Freddie Mac Sells $2 Billion in Notes

The Federal Home Loan Mortgage Corporation, so stupidly dubbed “Freddie Mac” by Wall Street, sold about $2 billion in debt on Monday. Demand was surprisingly strong, and while Freddie Mac did have to pay a premium on the issue, it is a sign that the recent decline in the company’s stock is just about over.

Freddie sold $1 billion of three-month bills at 2.58 per cent, compared with a 2.475 per cent rate for similar paper sold last week. The company also paid a higher 2.858 per cent rate to sell $1 billion of six-month paper, compared with 2.78 per cent for a similar sale last week. The increments may seem negligible, but a fraction of a percent on a billion is still worth picking up if one sees it in the gutter.

These higher rates got the attention of bond investors. Because Freddie Mac and Fannie Mae (the name is equally stupid) are government sponsored enterprises, it is presumed they are as good as the US government’s own debt. The stock may fall off the face of the earth, but the US government will honor these bonds, the thinking goes, because if it doesn’t, the entire financial system of the US will implode. As a result, investors could get a higher yield with as little risk as a T-note. Bids were 3-4 times greater than the amount on offer, as opposed to 2.5 times last week.

Freddie and Fannie have to tap the debt markets from time to time to refinance maturing issues that fund their combined $1.5 trillion in mortgage investments. Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion, according to figures provided by the companies and data compiled by Bloomberg. That this sale went through so solidly is a good sign.

Still, they aren’t out of the woods. As Warren Buffet remarked on CNBC on Friday, the two have no real net worth. He added that as independent companies, “the game is over.” Mr. Buffet is right, and it is only a matter of time before someone in Washington realizes that they need to be nationalized, cleaned up, broken up and re-privatized as a dozen competing entities with a proper regulator watching them.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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