Friday, March 03, 2017 9:57:39 AM
Freddie Mac Earnings Surprise: FAS 133 And What It Means
Feb.16.17 | Glen Bradford
Summary
Freddie Mac reverted to pre-conservatorship FAS 133, an action which prevents them from having to borrow to pay non-cash hedge gains to US Treasury.
There was a change in language surrounding the net worth sweep to include the word 'Scheduled'.
More documents have come out that suggest that the government implemented the net worth sweep in a blatant attempt to take more than their fair share.
Freddie Mac (OTCQB:FMCC) reported earnings Thursday. First, Freddie Mac changed back to FAS 133 which prevents the recognition of massive hedge gains and losses. Under the previous administration, this likely would not have happened thereby forcing Freddie Mac to borrow to pay the non-cash hedge to US Treasury. Second, Freddie Mac added 'Scheduled' language to the dividend payment. These are changes are not insignificant.
Investment Thesis: The government has, without FAS 133, been able to enrich itself by means of an accounting statement agreement that was subsequently amended to become a net worth sweep agreement. FAS 133 is a major step in solving the outstanding capital requirements issue as it literally prevents the discretionary enrichment of Treasury by FHFA. If Fannie Mae (OTCQB:FNMA) or Freddie Mac are able to lower their dividend obligations to Treasury by making changes in accounting policy it's not beyond reason for them to find other ways to do so. I am a preferred shareholder and am betting on a recapitalization.
Freddie Mac: Return To FAS 133 Accounting
The return to FAS 133 makes the payments to Treasury smaller in a raising interest rate environment. $10B+ of payment to Treasury will now be avoided by reinstating FAS 133:
During conservatorship, Freddie Mac was able to write mortgage backed securities to whatever they wanted to. The return to FAS 133 will make it really easy to determine the value of the equity going forward and was really the first step towards getting out of conservatorship as a going concern. Prior CFO Timothy Howard of Fannie Mae weighed in:
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