Will Freddie Be Able to Raise Private Capital?

One thing is clear: Freddie Mac (FRE) needs extra capital, and has committed to raising $5.5 billion in capital at some point in the not-too-distant future. A constant drumbeat of bad news surrounding the GSE, however, has likely made it increasingly difficult for the company to raise that capital via common or preferred share placements in the private market, various published reports suggested Friday. “Senior management has been talking with a wide array of possible investors this week,” said David Palombi, Freddie Mac’s chief spokesman told the Wall Street Journal Friday morning. Right or wrong, however, it’s clear that the GSE is running up against a wall of investor fear in attempting to shop an investment to private-equity and other institutional investors. Part of that is tied to what’s been called “Paulson’s bazooka” — the Treasury’s new-found authority to inject essentially unlimited capital into both Freddie Mac and sister GSE Fannie Mae (FNM), which most assume would entail wiping out common and most preferred shareholders. And there’s the as-of-yet unresolved issue of what a newly-empowered Federal Housing Finance Agency, the GSE’s new regulator, will impose in the way of capital requirements. For all the uncertainty right now, one thing is clear: both Fannie and Freddie are too big to fail. And while investors assume they would be wiped out in the event of Treasury intervention, others are assuming that any intervention would entail nationalization of the two quasi-private entities. Officials at the Treasury and both GSEs have stressed repeatedly, however, that they have no interest in using the government backstop; further, Treasury officials have not clarified if any investment by the government would, indeed, wipe out shareholders. Nor have they clarified that any such investment, were it to be used, would entail a de facto nationalization of either firm. Which is to say that uncertainty rules the day. Billionaire investor Warren Buffett, however, suggested on Friday morning that should the GSEs need fresh capital, neither will realistically be able to raise it from private investors. “They’re looking for help, obviously. And the scale of help is such that I don’t think it can come from the private sector,” Buffett said in an interview on CNBC. The question, of course, is whether Freddie is permanently locked out of the equity market; both companies and more than a few analysts have speculated recently that press leaks from Bush administration hawks have largely been to blame for the GSE’s recent woes. On Aug. 7, Rep. Henry Waxman (D-CA), chairman of the House Oversight and Government Reform Committee, asked CEOs of both GSEs if there is any evidence of White House officials tampering with their share prices. Analyst Jim Vogel at FTN Financial has recently estimated that Freddie has ample capital to operate without taking drastic measures for another four quarters, relative to expected losses and current reserving activity. Which means the question of raising private capital may not be the immediate issue it’s being made out to be; but with Freddie actively feeling out potential investors this week, the GSE may be looking to raise capital regardless. Shares in Freddie Mac started out positive in early trading Friday, but had moved into negative territory, off 2.5 percent when this story was published. Disclosure: The author was long FRE when this story was published; indirect holdings may exist via mutual fund investments, as well. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.