Sunday, March 3, 2013

Freddie Mac 2012 Earnings On Fire

Before 2007, Freddie Mac generated consistently large annual after-tax earnings of at least several billions of dollars per year.

Then in 2007, these annual after-tax earnings started turning into losses, which peaked in 2008 at a massive $50.1 bil.

These annual losses continued through 2011.  Thus, for the five years from 2007 to 2011, these cumulative after-tax losses totaled a gargantuan $94 bil.  Since US taxpayers are effectively on the hook for Freddie Mac's losses, US citizens were rightly enraged at the amounts of these losses.

But on the positive side, the amounts of these annual losses were consistently reduced from 2008 to 2011, going from $50.1 bil in 2008 to only $5.3 bil in 2011.

So, what happened in the current year 2012?  Well, Freddie Mac completely turned around these losses with after-tax earnings of a massive $11.0 bil.  No, that's not a misprint.  US taxpayers have to be just elated with what happened in 2012 with Freddie Mac's earnings.

So, what's going on here behind just the bottom line earnings and losses numbers?

Well, it's really three items which have caused this incredible earnings and loss pattern.

The first two are related to the financial meltdown and subsequent housing improvement.  But it should be pointed out that the US Fed provided major assistance here by providing an incredibly low interest rate environment since the 2008 financial meltdown.

Freddie Mac's Provision For Credit Losses totaled $76.7 bil for the five years from 2007 to 2011, growing rapidly from $2.9 bil in 2007 to $16.4 bil in 2008, and then topping out at $29.5 bil in 2009.  Then these annual Provision For Credit Losses turned around and started declining to $17.2 bil in 2010 and further declining to $10.7 bil in 2011.  And then what happened in 2012?  These Credit Losses declined further to only $1.9 bil.

And Freddie Mac's Impairment of Available-For-Sale Debt Securities Earnings Charges totaled $35.9 bil for the five years from 2007 to 2011, maxing out at $17.7 bil in 2008, and consistently declining to only $2.2 bil in 2012.

The other item causing Freddie Mac's earnings decline were its Derivative Losses, which totaled $36.6 bil for the five years from 2007 to 2011.  Particularly notable here were massive Derivative Losses of $15.0 bil in 2008, another $8.1 bil in 2010, and another $9.8 bil in 2011.

While Freddie Mac's Credit Losses and Debt Securities Impairment charges were driven by the housing crisis and subsequent improvement, I don't think the same can be said of the Derivative Losses.

Financial Derivatives are a zero-sum game, for every dollar of losses, there is the same dollar of gains.

Thus, Freddie Mac's massive amounts of Derivative Losses should be particularly troubling to US taxpayers.  I think that Freddie Mac got its clock cleaned in the financial derivative markets by much more savvy traders.

On the positive side, it seems that Freddie Mac did much better in 2012, with Derivative Losses of a much lower, but still significant $2.4 bil.

Freddie Mac should do well in 2013, as long as it can continue its moderation of Derivative Losses.  But you won't see a massive earnings improvement in 2013 as you saw in each year from 2009 to 2012.

But still, if Freddie Mac can just match its 2012 after-tax earnings of $11.0 bil, then it would be able to pay back the money it was bailed out by US taxpayers in less than ten years.  So from any reasonable CBO scoring over the next ten years, there should be a huge US Debt Reduction from this huge $16.3 bil recovery in Freddie Mac's earnings in 2012.....going from a loss of $5.3 bil in 2011 to earnings of $11.0 bil in 2012.

Below here are Freddie Mac's earnings and loss elements for the six years from 2007 to 2012:


6 Years

2012 2011 2010 2009 2008 2007 2007-11
Freddie Mac mils $s mils $s mils $s mils $s mils $s mils $s mils $s

Net Income (Loss) 10,982 (5,266) (14,026) (21,554) (50,116) (3,102) (94,064)

Pretax Income (Loss) 9,445 (5,666) (14,882) (22,384) (44,564) (5,989) (93,485)

Provision For Credit Losses (1,890) (10,702) (17,218) (29,530) (16,432) (2,854) (76,736)

Derivative (Losses) (2,448) (9,752) (8,085) (1,900) (14,954) (1,904) (36,595)

Available-For-Sale Debt Securities Impairment Earnings Charge (2,168) (2,301) (4,308) (11,197) (17,682) (365) (35,853)

It should be interesting to see how the even larger Fannie Mae's earnings and loss numbers come out.  To the delight of both US taxpayers and US Debt fiscal hawks, I think you will see a somewhat similar earnings and loss pattern as you see here with Freddie Mac.