Freddie Mac Considering $10 billion Equity Raise

Is Freddie Mac telling Hank Paulson to take a hike?

That is essentially what Freddie Mac (FRE-NYSE) CEO Richard Syron seems to be telling the Treasury Secretary. A two-day rally in the shares of the GSE's has provided a glimmer of hope, and the company is apparently trying to wiggle free of Paulson's grasp; it they can pull off a deal they can escape Hank and his draconian regulatory posture. Lets face it, if Paulson is in the drivers seat, working at Freddie or Fannie Mae (FNM-NYSE) is not going to be a lot of fun once he gets his meathooks into them:

Mortgage giant Freddie Mac -- emboldened by emergency regulatory actions that have triggered a two-day rebound in its battered stock -- is considering raising capital by selling as much as $10 billion in new shares to investors, according to people familiar with the matter.

The high-stakes maneuver would have the potential to avoid a full-blown government rescue for Freddie Mac and Fannie Mae, twin keystones of the U.S. housing market. The publicly traded, government-sponsored companies own or guarantee about $5.2 trillion of home mortgages, or nearly half the total outstanding, and are at the center of government efforts to prop up the sagging housing market. WSJ

Paulson's plan, which is taking shape as we speak, might not to be very palatable to employees or common equity shareholders, but Freddie's capital raise should be massively dilutive, and might only delay an eventual bailout.

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Is a rights offering on the table?

A sale by Freddie of common and preferred stock could be tough to pull off. For starters, the preferred shares would require Freddie to offer a very high rate of return to attract buyers. The yield on one existing issue of Freddie’s preferred stock, for example, is about 13.8%.

At that rate, even a $5 billion preferred-stock offering would entail a $690 million annual payout, on top of the $272 million Freddie paid out on its existing preferred shares in the first quarter. That would reduce the money available to common-stock shareholders, cutting the value of those holdings and potentially sending the stock price lower.

The main buyers for any new-stock issues are likely to be existing shareholders world-wide, according to one person involved in the discussion, adding that a definitive plan hasn’t yet been determined.

Scrounging up buyers could be tough, but jamming a deal down the throats of existing shareholders might allow the deal to get done.

Meanwhile, across town, Hank Paulson is lining up support for his plan. While he likely knew the GSE’s were working on something, I would like to see the look on his face right about now.

Will Syron be able to pull off his deal before Hank gets his ducks in a row? Can the Goldman alum live up to his lofty reputation, beat Syron to the punch and fire his ass ASAP? Enquiring minds want to know....

Paulson spent a second straight day lobbying on Capitol Hill after legislators balked at a July 15 hearing at his initial request, which Treasury officials anticipated would be enacted this week. Paulson is trying to provide a backstop to Fannie Mae and Freddie Mac after their shares fell to the lowest level in more than 17 years this month, threatening to limit their ability to alleviate the mortgage-market collapse.

``I feel even better than I did yesterday in my confidence level that we will come to a very acceptable result, and come to it next week,’’ Paulson told reporters yesterday....Paulson, since announcing his plan Sunday, July 13, has repeatedly called for power to make ``unspecified’’ equity purchases in the two companies, which account for about half of the $12 trillion U.S. mortgage market. He wants a similar right to extend the credit lines the firms have with the Treasury.

Paulson has said limits to his power would impede the measure’s ability to buttress investor confidence. The Treasury had sought for it to be outside the borrowing ceiling.

I am still trying to figure out how shareholders win here.

In any case, it would appear Bill Ackman’s plan is falling on deaf ears. His short in the stocks of the GSE’s turned unprofitable mid-day Thursday, but this move by Freddie could certainly stop the nascent rally in its tracks.

Maybe they can get a deal priced several bucks in the hole from the July 17th close. But with the stock at $8.33, that does not give them much wiggle room.

I don’t know whether to laugh or cry, but I have bigger problems to deal with.

A former, and now unemployed Bear Stearns money manager is visiting for me for the weekend, looking to log a little beachtime in what appears to be a stellar weekend of weather on the East End of Long Island. I have only a few hours left to hide the silverware and china.

With Merrill, Google, Microsoft and Capital One trading down afterhours, and this news hitting the tape, you might be on your own Friday, as it is not shaping up so well with S&P futures off about 10.80 at 1:00 AM EST.
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The GSE’s are good for America. Well, at least American lobbyists. The rest of us get to suck an egg. Watch this to see how much they spend on lobbying annually.

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Mortgage Giant Freddie Mac Considers Major Stock Sale
WSJ

U.S. Lawmakers Seek to Tie Fannie-Freddie Aid to Debt Limit
Bloomberg
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