August 28, 2008 / 11:01 AM / 11 years ago

Is Freddie Mac next in GSE management shake-up?

NEW YORK (Reuters) - Freddie Mac, the second-largest U.S. mortgage finance company, may soon follow its larger sibling Fannie Mae with a management shake-up that could boost investor confidence in the company.

Shares of both government-sponsored enterprises, or GSEs, jumped for a fourth straight session on Thursday, a day after Fannie Mae FNM.N announced a shake-up of top executives including the exit of its chief financial officer.

Investors believe Fannie Mae’s action was a move in the right direction. Now some say it is only a matter of time until Freddie Mac FRE.N, which has a weaker capital position than Fannie Mae, follows suit with its own overhaul, and one that could include the removal of chief executive Richard Syron.

“Does Syron get the blame for not raising equity when (Freddie Mac’s stock) was at $20? That seems to be the distinction between Freddie and Fannie,” said James McGlynn, portfolio manager at Summit Investment Partners, who is based in Southlake, Texas. Freddie Mac shares were trading around $5.25 in mid-afternoon on Thursday.

“Someone was pigheaded and said, ‘I don’t need to raise equity until things improve,’” McGlynn said.

Indeed, raising capital is one of the main distinctions between the two mortgage finance giants. Fannie Mae raised $7.4 billion in May and has said it may need to tap the market again, depending on how large losses are in coming quarters.

In contrast, Freddie Mac pledged in May to raise $5.5 billion of capital to bolster its balance sheet, but has yet to take any action.

Still, McGlynn said Syron had built up goodwill at Freddie Mac for the role he played in ushering the company out of a multibillion dollar accounting scandal earlier this decade.

“I don’t know if there’s a higher ranking person at Freddie Mac that has the trust of the people and the Street,” he said.

In July, Congress gave the U.S. Treasury authority to lend money to or acquire equity in Fannie Mae and Freddie Mac if needed to prop them up.

The shares of the two government-sponsored enterprises hit almost two-decade lows last week as fears grew that rising mortgage defaults and falling U.S. house prices could erode the capital of the two companies, leading to a rescue that would leave their common shares worthless.

That prospect, however, has appeared to fade this week as the companies enjoyed demand for debt sales and a multitude of Wall Street analysts said they had no immediate need for capital.

WHAT’S THE PROBLEM? HOUSING OR CEO?

Fannie Mae and Freddie Mac, which own or guarantee nearly half of all outstanding U.S. mortgages, have reported a combined loss of about $14 billion for the past four quarters as the worst U.S. housing market downturn since the Great Depression brought on a wave of mortgage defaults.

“Are these problems that Freddie Mac is creating daily or are these problems because the housing market stinks?,” said Gary Gordon, stock analyst at Portales Partners in New York.

“The loan portfolio they went into this year with is the loan portfolio they are going to have to deal with throughout this cycle, so whether Richard Syron or Michael Phelps is the head of Freddie Mac, it is the same issue,” he said, referring to the American swimmer who won a record-breaking eight gold medals at the Beijing Olympics.

The housing market, however, has shown signs of bottoming out, which could portend smaller losses down the road.

“It was not an internal issue that put Fannie Mae and Freddie Mac into the position they are in, so an internal management restructuring will not fix it,” Gordon said.

Fannie Mae’s shake-up of top executives included the exit of its chief financial officer, but not its chief executive officer, Daniel Mudd.

James Post, a professor at Boston University’s School of Management, said the leadership changes at Fannie Mae are probably just the beginning.

“CEO Daniel Mudd has temporarily escaped the executioner,” he said in a e-mail. And unless Fannie Mae returns to soundness, “Mudd’s days may be numbered as well.”

Post said the boards of directors at the two companies must be impatient given the intense pressure from shareholders, bondholders, regulators, Congress and the U.S. Treasury.

“So, the story line leads in two directions: What happens at Fannie Mae, and how soon will the same fate befall Richard Syron at Freddie Mac,” he said.

Additional reporting by Al Yoon, Editing by Chizu Nomiyama

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below