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Freddie Mac, the mortgage finance giant at the heart of the crisis in the US financial system, is deeper in the red than anyone on Wall St had been predicting, it was revealed this week.
The company is in negotiations with the US government about a rescue refinancing that could top up its coffers by US$5.5 billion ($7.8 billion) or more, but its chief executive, Richard Syron, said the talks would take time.
A bill allowing a government bail-out of unspecified size passed Congress last month, after Freddie and its sister company Fannie Mae appeared on the brink of a collapse in confidence that could have sunk the companies.
Freddie and Fannie - known as government-sponsored entities, or GSEs - own or guarantee about US$5 trillion of US mortgages, about half the total, but a rising tide of defaults and repossessions has wrecked their careful financial plans.
"Neither we nor anyone else can predict when the housing market will fully recover and it would be folly to try to do so, but I can promise you Freddie Mac will play a pivotal role in ensuring it does so," Syron said.
The US Treasury has hired Morgan Stanley to advise it on doing a deal with Freddie and Fannie, which might involve using taxpayer money to buy shares.
Freddie said it expects institutional investors will ultimately provide the cash, when markets recover.
Meanwhile, Syron has warned Freddie's existing shareholders their holdings could be significantly diluted, and he cut their dividend too.
The company wrote down the value of its mortgage holdings by another US$1 billion and said its liabilities now exceeded the value of its assets by US$5.6 billion. The loss for the three months to end-June was US$821 million, four times what Wall St analysts had been expecting.
Syron mounted a robust defence of Freddie's position in the mortgage market. It buys mortgages and parcels them up into mortgage-backed securities, which it sells on. The practice ensures a steady flow of funds to lenders.
"There is an essentiality to the GSEs right now," he said. "It would be an extremely ugly mortgage market that didn't have GSEs in it."
Separately, a Wall St panel has advised regulators and bank executives to give closer scrutiny to mortgage derivatives, including mortgage-backed securities and collateralised debt obligations.
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