Freddie Mac: A Peculiar Speculation

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Freddie Mac, or the Federal Home Loan Mortgage Corporation, is, shall we say, an unusual case. A government-sponsored enterprise, naturally, and therefore operating under rules that defy conventional financial logic. It is profitable, undeniably, but its future hinges less on astute management and more on the whims of regulators and the peculiar inertia of Washington. One might almost describe it as a perfectly constructed absurdity.

The tale is familiar enough. Both Freddie and its sister organisation, Fannie Mae, found themselves in the government’s care during the regrettable unpleasantness of 2008. They busily purchased mortgages – some of a distinctly questionable character – bundled them into securities, and thus kept the whole rickety edifice of home financing from collapsing entirely. A noble effort, perhaps, but one that left them rather exposed when the inevitable reckoning arrived.

The Treasury, with characteristic generosity, stepped in with funds amounting to hundreds of billions. In return, it acquired a stake equivalent to a rather alarming 80% of the outstanding shares, along with some senior preferred stock. A transaction that, one suspects, would have troubled even the most seasoned City gentleman.

For years, Freddie and Fannie operated under a ‘net worth sweep’ agreement, dutifully handing over all profits to the Treasury. A state of affairs that, while fiscally prudent from the government’s perspective, did little to encourage shareholder enthusiasm. Then, in 2019, the sweep ended, and the two GSEs were permitted to retain earnings. A gesture that, while welcome, hardly resolved the underlying conundrum.

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The Illusion of Freedom

The prospect of escaping conservatorship – that is, regaining independence from the government – is, of course, the holy grail. There has been talk, particularly during the Trump administration, of achieving this. One senses, however, that the path is strewn with obstacles. The dilution from those warrants and preferred shares is a considerable impediment, and there is a lingering fear that removing the implicit government guarantee might send mortgage rates soaring.

Yet, one suspects that Freddie and Fannie are, in reality, ‘too important to fail.’ Their role in the mortgage market is simply too vital to allow them to collapse. The question, therefore, is not if they will be released from conservatorship, but how. And the answer to that question, predictably, involves a great deal of political maneuvering and bureaucratic delay.

If the government manages to navigate these complexities and conduct initial public offerings, the potential upside is considerable. Both companies are highly profitable, but currently trade at a fraction of their intrinsic value due to the dilution risk and the uncertainty surrounding their future. It is, in essence, a gamble. A rather large gamble, admittedly.

Investing in Freddie Mac is, one must concede, a risky proposition. The matter is firmly in the hands of regulators, and the outcome is subject to political winds. If the company remains in conservatorship, the stock is unlikely to appreciate. Still, given the potential for a multi-bagger return, a small investment may be warranted. One might also consider the junior preferred shares, which offer less dilution risk but also less upside. The common shares, of course, are the most alluring, but also the most precarious.

It is, in the end, a curious spectacle. A profitable enterprise, shackled by bureaucracy and political considerations. A gamble, perhaps, but one that, with a little luck and a great deal of patience, might just pay off. Or, of course, it might not. Such is the nature of speculation.

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2026-02-14 12:15