Freddie Mac 2004 Profits Plunge on Derivatives

Freddie reported 2004 net profit of $2.8 billion, or $3.78 per diluted share, compared with $4.8 billion, or $6.68 per share, in 2003.

It blamed the drop on losses related to derivatives that were bought as part of ordinary trading activity to hedge against interest rate risk. Unlike derivatives used as a hedge against fluctuations of assets or liabilities value, a drop in value of these derivatives is accounted for in the income statement and reduces income. Freddie, based in McLean, Virginia, said that while its derivatives can lead to big earnings swings, the instruments remain important in managing interest rate risk.
By the second quarter of 2006,

Freddie said it aims to register its stock with the Securities and Exchange Commission -- a voluntary move for the government-sponsored enterprise that would force it to disclose more. Fannie Mae (FNM), Freddie's sister GSE and the No. 1 U.S. mortgage finance company, registered with the SEC in 2003.

Freddie ended 2004 with a surplus of capital that exceeded its regulatory target by $3.5 billion. That, analysts said, could give the company room to grow or offer higher dividends.

Freddie said legislative changes may make it impossible to both support the housing market and serve the interests of shareholders.
"Legislative or regulatory limitations on our ability to conduct these activities, through restrictions on portfolio size, debt issuance or otherwise, could require us to significantly alter our current business activities and could adversely affect our future profitability," Freddie Mac said.

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