Freddie Mac was plugging along just fine, when it generated Pretax Incomes of $2.5 bil in 2005 and $2.3 bil in 2006, but then some trouble started to happen in 2007, when this string of annual profits, occurring for many years, reversed course and turned into a 2007 Pretax Loss of $6.0 bil.
This $8.3 Profit Decline in 2007 from 2006 was caused by several factors.
First, its Provision for Credit Losses were stepped up dramatically from $.3 bil in 2006 to $2.9 bil in 2007. Thus even before the complete financial meltdown in 2008, somebody at Freddie Mac, or at its external CPA firm, presciently sniffed out the coming bad winds, which eventually turned into a devastating tornado, in the real estate market.
Second, Freddie Mac incurred a Foreign Currency Loss of $2.3 bil in 2007.
Third, Freddie Mac incurred a Loss on Loans Purchased of $1.9 bil in 2007.
And fourth, Freddie Mac incurred Losses on certain credit guarantees of $2.0 bil in 2007, much higher than such Losses in 2006 of $.4 bil
Then the real estate tornado hit, with Freddie Mac recording Pretax Losses as follows: $44.6 bil in 2008, $22.4 bil in 2009, $14.9 bil in 2010.
So while these losses are just huge, the one positive aspect is that they were declining sharply from the massive 2008 Loss.
And then in the 1Q 2011, this positive trend continued, with Freddie Mac actually generating a Pretax Income of $.6 bil, a complete reversal from its 1Q 2010 Pretax Loss of $6.8 bil.
But that’s the best it gets.
In the 2Q 2011, Freddie Mac recorded a Pretax Loss of $2.4 bil, which was a reduction from the much higher Loss of $5.0 bil in the 2Q 2010.
And now in the most recent 3Q 2011, Freddie Mac recorded a $4.5 bil Loss, which was 89% higher than the 2Q 2011 Loss of $2.4 bil. And this 3Q 2011 $4.5 bil Loss was 53% higher than the 3Q 2010 Loss of $2.9 bil.
From its SEC filings, below here is a very condensed summary of Freddie Mac’s Income Statements for the 3Q 2011, as compared with the 3Q 2010.
................................................................................Increase
...................................................3Q...........3Q........(Decrease)
.................................................2011.......2010....Amount......%
................................................(millions of dollars)
Net Interest Income................4,613......4,279........334.........8%
Provision for Credit Losses....(3,606)...(3,727)........121.........3%
Derivative Losses.............(4,752)...(1,130)..(3,622)..(321)%
Impairment of AFS
…Investment Securities............(161)....(1,100).......939.......85%
Other Loss on Inv Sec...............(541)......(503)........(38).......(8)%
Administrative Expenses..........(381)......(388)............7........2%
Other-net..................................350........(353).......703.....199%
Pretax Loss...........................(4,478)...(2,922)...(1,556).....(53)%
Clearly, the Losses are driven by the Derivative Losses.
In fact, absent the 3Q 2011 Derivative Losses of $4.8 bil, Freddie Mac would have recorded a Pretax Profit of $.3 bil. And the massive $3.6 bil Derivative Loss increase from the 3Q 2010, was $2.0 bil greater than the $1.6 bil increase in the Total Pretax Loss from the 3Q 2010.
And below here is a very condensed summary of Freddie Mac’s Income Statements for the lst 9 months Sept 2011, as compared with the lst 9 months 2010.
..............................................9 Mos....9 Mos.....Increase
..............................................Sept.......Sept.....(Decrease)
..............................................2011......2010.....Amount.......%
..............................................(millions of dollars)
Net Interest Income...........13,714......12,540......1,174........9%
Provision for
...Credit Losses..............(8,124)....(14,152)....6,028......43%
Derivative Losses.........(8,986)....(9,653).......667.......7%
Impairment of AFS
…Investment Securities.....(1,706).....(2,038).......332.......16%
Other Losses on Inv Sec........(452).....(1,176)........724.......62%
Administrative Expenses....(1,126).....(1,197).........71.........6%
Other-net................................433.........963.........530.......55%
Pretax Loss........................(6,247)..(14,713).....8,466.......58%
Yeah, for the first nine months of 2011, the prior year Pretax Loss was reduced by $8.5 bil.
What’s caused this Loss reduction?
Well, it’s mainly a $6.0 bil reduction in the Provision for Credit Losses. That takes away a great deal from the quality of the Pretax Loss reduction.
Also, it’s a $1.2 bil increase in Net Interest Income.
Further, it’s a $1.1 bil reduction in impairment and losses on its massive Investment Securities portfolio.
I think it would be wise to take a longer term look at Freddie Mac’s income statements: just before, during, and after the financial meltdown. But then I guess for Freddie Mac and Fannie Mae, the financial meltdown is still going on.
From SEC filings, below here is a very condensed summary of Freddie Mac’s Income Statements for 2006 through 2011.
.....................9 Mos...Annual...Annual..Annual..Annual..Annual
.....................2011.....2010......2009.....2008.....2007.....2006
………….….............................(millions of dollars)………………......
Int Income..75,644.109,956..40,346..41,477..42,910..42,264
Int Exp.......(61,349)(92,131)(22,150)(33,332)(38,482)(37,270)
Derivative
..Expense........(581)....(969)...(1,123)..(1,349)...(1,329)..(1,582)
=Net Int Inc.13,714..16,856..17,073....6,796....3,099.....3,412
Prov for Credit
..Losses.......(8,124)(17,218)(29,530)(16,432)...(2,854)....(296)
Derivative
..Losses.......(8,986).(8,085)..(1,900).(14,954)..(1,904)..(1,173)
Gain(Loss) on
..Investment
..Securities.(2,158)..(5,560)..(5,232).(16,181).......294.....(473)
Mgt & Guaranty
…Income.....................143.....3,033.....3,370....2,635....2,393
Gain(Loss) on
…Guranteed
...Assets.......................(61)....3,299...(7,091)...(1,484)....(978)
Income on
..Guaranteed
..Obligations................135....3,479.....4,826.....1,905.....1,519
Low Income
..Housing Tax
..Credit................................(4,155).....(453)......(469).....(407)
Loss on Loans
…Purchased..................25..(4,754)...(1,634)...(1,865).....(148)
Security Admin
..Loss on
..Invests............................................(1,082)
Losses on
..Certain Credit
..Guarantees..........................................(17)....(1,988)....(406)
Foreign Currency
…Gains(Losses)................................................(2,348)........96
Admin
..Exps....(1,126)...(1,546)...(1,651)...(1,505)....(1,674)...(1,641)
Other-net..433........429....(2,046).....(207)........676........384
=Pretax
..Income
..(Loss).(6,247).(14,882)(22,384).(44,564)....(5,977)....2,282
In analyzing the above income statements, I have several comments.
First, look how much Net Interest Income jumped in 2009 to $17.1 bil, from $6.8 bil in 2008. I wonder if that is related, at least in part, to the subsidy the US Government granted to Freddie Mac to put them in a better financial situation. Clearly, it is not an economic gain earned from Freddie Mac’s operations, even though it is reflected in Freddie Mac’s bottom line.
Second, prior to 2007, there were just meager Provision for Credit Losses, charged to annual earnings. Let me lay these out for the past decade:
2000…........$79 mil
2001…...…..$32 mil
2002…….....$12 mil
2003….…...$(5) mil
2004…...…$143 mil
2005….....$307 mil
2006….....$296 mil
2007.....$2,854 mil
2008...$16,432 mil
2009...$29,530 mil
2010...$17,218 mil
2011.....$8,124 mil*
* 9 Months ended Sept 2011
Frankly, it doesn’t make sense to me why the Provisions for Credit Losses were so low before the financial meltdown. The amounts of Loans and Loan Guarantees were massive. Certainly more than these above meager amounts of bad loans should have been provided for.
Also, it seems to me that the 2008 Provision for Credit Losses of $16.4 bil is low. The massive financial meltdown occurred in 2008, but yet the following year's Provision was $13 bil higher than that provided in 2008. There is no logical match with when the loans should have been determined to be bad, and when the Provisions for Credit Losses were booked.
Likewise, the $17 bil additional Provision in 2010 seems really strange to me. So, the economic damage in the real estate market was more pronounced in 2010 than it was in 2008? That’s crazy.
Further, I think the real economic damage of these Loans is much less in 2011 than the huge Provision for Credit Losses booked in that year.
And third, and most important of all, what in the world is going on with all of these massive Derivative Losses. Let me lay them out since 2004.
...........Derivative...Derivative...Total Cost of
..............Losses.......Expenses....Derivatives
...............(millions of dollars)
2004.....4,475..........(100)............4,375
2005.....1,321..........1,058............2,379
2006.....1,173..........1,582............2,755
2007.....1,904.........1,329.............3,233
2008...14,954.........1,349...........16,303
2009.....1,900.........1,123............3,023
2010.....8,085...........969.............9,054
2011*....8,986...........581.............9,567
Total...42,798........7,891...........50,689
* 9 Months Sept 2011
Wasn’t it Albert Einstein who defined Insanity as “doing the same thing over and over again and expecting different results”?
None of these years have Derivative Gains, and the total Derivative Losses are more than $50 bil!
If I understand this correctly, if Freddie Mac would not have engaged in any derivatives, it would have had higher earnings of more than $50 bil over the past 8 years.
I think the question the US Government should be asking is just who profited from these $50 bil of Derivative Losses, and how much money did they each make on them?
I think the US Government, including the US Congress and their staffs, have enough people working on the housing crisis, including reviewing what is going on with Freddie Mac and Fannie Mae.
But I also think the reason the housing crisis hasn’t been substantially improved, including the problems with Freddie Mac and Fannie Mae, is that the US Government doesn’t have enough very bright people, who also have the requisite financial expertise, who are working on these very complex housing crisis issues, so critical to improving the US economy, and US job creation.
The US Congress has done nothing of substance that effectively deals with the housing issue. And I think that all of the Feds responsible for reviewing, and taking wise subsequent actions on, what has been going on with Freddie Mac and Fannie Mae, haven’t effectively done their jobs.
The Occupy Movement, and their 99% supporters, are spot on in identifying the housing crisis as one where there clearly has not been enough progress made.
And just the thought of Freddie Mac throwing $50 bil away in the past 8 years by making bad, or at least less than optimal, Derivative decisions is enough to make the 99%ers intensely angry. Fannie Mae hasn't reported its 3Q 2011 Earnings yet, thus it should be interesting to see how their financial instrument hedging management program, or Derivatives, have worked out.
So the Deficit Reduction Super-committee is thinking of reducing Medicare, Medicaid and Social Security Benefits, while at the same time, not taking the proper actions to substantially reduce Freddie Mac's recurring, massive Derivative Losses? That's not right.....not even close to being right.
