From freddiemac.com (from yahoo board)
"Changes in Mortgage-To-Debt OAS
The fair value of our net assets can be significantly affected from period to period by changes in the net OAS between
the mortgage and agency debt sectors. The fair value impact of changes in OAS for a given period represents an estimate of
the net unrealized increase or decrease in fair value of net assets arising from net fluctuations in OAS during that period. We
do not attempt to hedge or actively manage the basis risk represented by the impact of changes in mortgage-to-debt OAS
because we generally hold a substantial portion of our mortgage assets for the long term and we do not believe that periodic
increases or decreases in the fair value of net assets arising from fluctuations in OAS will significantly affect the long-term
value of our mortgage-related investments portfolio. Our estimate of the effect of changes in OAS excludes the impact of
other market risk factors we actively manage, or economically hedge, to keep interest-rate risk exposure within prescribed
limits."
"For 2008 and 2007, we estimate that on a pre-tax basis the changes in the fair value of net assets, before capital
transactions, included decreases of approximately $90.7 billion and $23.8 billion, respectively, due to a net widening of
mortgage-to-debt OAS."
For those of you who don't understand, it says FRE had to write down 90.7 Billion in 2008 and 23.8 Billion in 2007, or 114.5 Billion total due to mark to market. In the first paragrah, you'll also notice that FRE is pissed they had to do this, since they state they hold mortgages for a longer period then year to year fluctuations in value. The 114.5 Billion loss is on the 800 Billion mortgage portfolio they hold, which means they are assuming the average worth of each mortgage they hold dropped by about 13% over the last 2 years.
Also, FRE had to write down losses on the mortgage backed securites they sold/guaranteed and these are called credits risks. They had to mark these down and pay the investors the differences, once again due to mark to market. This was several billion dollars too.
In the end, mark 2 market accounting has killed FRE, but the upcoming changes will save the company. I do not expect the value of FRE to rise by 114.5 Billion when m2m gets altered in 3 weeks, but somewhere up to 70 Billion is possible. This puts FRE at a net worth of about +20 Billion, after debting back to the Treas.
Considering there are now about 3.2 billion shares of FRE outstanding (stockholders =6.5 million, Tres=2.6 billion) that give a price per share of about 6$. Add in uncertainty over the future business model for FRE and you are likely to see a price per share of around 3$ after April 1. It may take a month or two to get there, but it'll move.
Whoops shorties...big whoops
