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Freddie Posts Loss, May Cut Dividend; Shares Plunge

Nov. 20 — Freddie Mac fell 29 percent, the biggest decline since it went public in 1988, as the second- largest U.S. mortgage-finance company posted a record loss, warning of a possible dividend cut and the need to raise capital.

The worst housing slump in 16 years caused “significant deterioration” in the third quarter that will continue through year-end, McLean, Virginia-based Freddie Mac said in a statement. The net loss was $2.02 billion, or $3.29 a share, three times what some analysts estimated.

“It’s as bad as it possibly could be,” said Howard Shapiro, an analyst at Fox-Pitt Kelton in New York. Shapiro recommended investors sell Freddie Mac shares, reversing his opinion to hold more of the stock than is contained in benchmark indexes.

Freddie Mac and the larger Washington-based Fannie Mae, created by Congress to foster American home ownership, have lost $41 billion in market value this year as mortgage defaults and foreclosures rose to record levels. The companies, which own or guarantee 40 percent of the $11.5 trillion U.S. home loan market, will have less money available for new mortgages.

“There is nothing we see right now to be more optimistic,” Chief Financial Officer Anthony Piszel said in an interview. He told analysts on a conference call that the fourth quarter “is not going to be pretty.”

The shares extended their slump to a fifth day, on concern that losses will continue into next year. Freddie Mac fell $10.76 to $26.74 in New York Stock Exchange composite trading and have tumbled 61 percent so far this year. Fannie Mae dropped 25 percent to $28.25 today and is down 52 percent on the year.

No Optimism

“These companies have lots of problems yet to come, I don’t think they really know,” how bad the losses will get, investor Jim Rogers, chairman of New York-based Beeland Interests Inc., said in an interview today. “I’m still short those companies.”

Fitch Ratings said it may reduce Freddie Mac’s AA- preferred stock ranking.

Freddie Mac had $1.2 billion in provisions for credit losses and reduced the value of assets by $3.6 billion. The third-quarter loss was almost triple the $715 million a year earlier.

The fourth quarter will also prove difficult, Chief Executive Officer Richard Syron told analysts on a conference call today.

A slump in the value of mortgages reduced core capital by two-thirds to $600 million more than Freddie Mac’s regulatory requirements, prompting the company to seek more money. Freddie Mac’s required capital level is 30 percent larger than typical as the company recovers from accounting mistakes revealed in 2003.

Raising Capital

The company “almost in the immediate future” will announce how it will increase capital, including the possibility of reducing its fourth-quarter dividend by 50 percent, Syron said in a conference call with investors. Freddie Mac also hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as advisers.

Should a dividend reduction fail to help meet capital reserve requirements, Freddie Mac may consider limiting growth, slowing purchases in its guarantee portfolio and selling preferred stock or convertible preferred stock, the company said.

Freddie Mac cut its portfolio by $29 billion in September and October, Piszel noted in the interview.

“What we’re trying to do is not force ourselves to continue to have to react in that way,” he said. Such reductions run “counter to our mission of liquidity and stability.”

“Determinations about what we do with our capital, both on capital raising and dividend actions, are the board’s decision and we have to give the board the opportunity to make that call,” Piszel said.

Ofheo Reaction

Freddie Mac’s regulator, the Office of Federal Housing Enterprise Oversight, endorsed the company’s capital plans.

The company’s “announcement of the steps it intends to take reflects prudential actions,” Ofheo Director James Lockhart said in a statement. “These actions should enhance its ability to continue to fulfill its housing finance mission.”

Congress created Fannie Mae and Freddie Mac to increase mortgage financing by buying loans from lenders. They profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

Great Depression?

Wells Fargo & Co. Chief Executive Officer John Stumpf last week said the housing market was the worst since the Great Depression. Banks and securities firms worldwide have already reported about $50 billion in losses from subprime mortgages, loans given to borrowers with weak credit, that have been defaulting at a record pace. The total damage may reach $400 billion, Deutsche Bank analysts said last week.

Merrill Lynch & Co., the world’s largest brokerage, on Oct. 24 reported $8.4 billion of writedowns on mortgage-related investments and corporate loans. Citigroup Inc., the largest U.S. bank by assets, said this month it may have to write down $11 billion more in subprime mortgage-linked securities.

Freddie Mac’s $713.1 billion portfolio as of September included $105 billion of securities backed by subprime mortgages.

“Even the strong credit managers with the best assets are not immune,” said Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee.

Foreclosures Rise

Fannie Mae Chief Executive Officer Daniel Mudd said the average price of homes may fall as much as 4 percent in 2008, causing Fannie Mae’s loan loss ratio to potentially more than double to 10 basis points. Fannie Mae’s third-quarter net loss more than doubled to $1.39 billion.

Homebuilding permits in the U.S. fell 6.6 percent in October to 1.178 million, the lowest level since 1993, as construction of single-family homes tumbled, the U.S. Commerce Department said today in Washington.

Foreclosure filings doubled to 223,538 in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, RealtyTrac Inc. said last month.

“We haven’t at all seen the bottom,” said Josh Rosner, managing director at New York-based research firm Graham Fisher & Co. Freddie Mac and Fannie Mae “will perform in lockstep” with other mortgage lenders because of their exposure to subprime borrowers.

Timely Reports

Credit-default swaps tied to Freddie Mac’s bonds rose 14 basis points to 69 basis points, according to broker Phoenix Partners Group in New York. The contracts are trading at the highest in at least four years, Credit Suisse Group data show. An increase in the contracts, used to speculate on the company’s creditworthiness, signals deterioration in investor confidence.

Today marks Freddie Mac’s third regular quarterly release in five years. The company stopped giving earnings after disclosing in 2003 that it understated two years of results by $5 billion. Freddie Mac plans in February to file results for all of 2007.

Fannie Mae and Freddie Mac have been constrained from buying mortgages because of regulatory restrictions imposed last year. Ofheo in September loosened some limits in an effort to ease a housing slump that’s caused other mortgage investors to retreat.

Senator Charles Schumer of New York and other Democrats have called on Ofheo to relax restraints barring Fannie Mae and Freddie Mac from buying loans exceeding $417,000 and from expanding their assets. The senator introduced legislation in September to let the companies temporarily increase their portfolios by 10 percent.

“Freddie’s earnings announcement provides confirmation that the foreclosure crisis has officially spilled over into the prime market,” Schumer said in a statement today. “Today’s news does nothing to lessen the critical role that the GSEs must play in providing much-needed liquidity to a struggling market. The whole reason Fannie and Freddie exist is to help in times like these.”

Japanese Commodity-Related Stocks May Rise on Record Oil Price

Nov. 21 — Japanese commodity-related stocks may advance after the price of oil rose to a record and copper, nickel and gold climbed. Mitsubishi Corp., Japan’s biggest trading company, may pace gains.

“The main focus for the market today is rising prices for things like oil and non-ferrous metals, which benefits the trading companies,” said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc.

Limiting gains, exporters such as Honda Motor Co. may drop after the Federal Reserve revealed that it lowered its 2008 U.S. growth forecast at its last meeting to as little as 1.8 percent from a previous estimate of 2.5 percent to 2.75 percent.

Nikkei 225 Stock Average futures expiring in December last traded in Chicago at 15,185, up from the close of 15,170 in Osaka and unchanged from 15,185 in Singapore yesterday. The Bank of New York Japan ADR Index, which tracks the nation’s American depositary receipts, jumped 1.9 percent.

Yesterday, the Nikkei climbed 1.1 percent to 15,211.52 and the Topix index gained 0.9 percent to 1,469.27.

Mitsubishi Corp. generates the second-largest proportion of its revenue from trading commodities. Mitsui & Co., Japan’s second-largest trading company, gets over half of its profit from dealing in metals, oil and natural gas. Inpex Holdings Inc. is Japan’s biggest oil explorer.

Fed Economic Assessment

Crude oil for January delivery jumped 3.6 percent to $98.03 a barrel in New York, the highest close since trading began in 1983. Copper futures rose 1.5 percent, while gold climbed 1.7 percent and nickel gained 0.4 percent. The contract was recently at $98.44.

U.S.-traded receipts of Honda, Japan’s No. 2 automaker, slumped 2.3 percent from the closing share price in Tokyo yesterday. Those of Sony Corp., the world’s second-biggest maker of consumer electronics, lost 0.7 percent.

The Fed lowered its outlook for U.S. growth at its meeting last month when it cut interest rates, minutes released yesterday showed.

“Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,” according to minutes of the Federal Open Market Committee’s Oct. 30-31 meeting.

Mitsubishi UFJ Financial Group Inc. may decline after Freddie Mac, the second-largest source of money for U.S. home loans, posted a record $2.02 billion loss as the country entered the worst housing slump in 16 years. Freddie Mac shares plunged 29 percent and dragged financial companies such as Citigroup Inc. lower.

Katokichi Co. may rise after the Nikkei newspaper reported the frozen foods maker will sell its stake in pub operator Hub Co. as Katokichi prepares to be bought by Japan Tobacco Inc. and Nissin Food Products Co. The shares may also gain after Mizuho Securities Co. boosted its recommendation to “strong buy” from “reduce.”

Tokyo Steel Manufacturing Co. may lead declines by electric-furnace steel producers after the Nikkei reported that 11 out of the 12 largest Japanese makers will probably see profits drop this year as soaring scrap prices drive up costs.

Crude Oil Rises Above $98 to a Record Close After Dollar Drops

Nov. 20 — Crude oil rose above $98 a barrel in New York to a record close after the U.S. dollar declined to a new low against the euro.

“As the dollar falls, U.S. refiners need to bid more to compete with overseas consumers,” said Rick Mueller, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “Investors look at crude oil as an inflation hedge. The weaker dollar also cushions the effect of higher oil prices in other countries so demand doesn’t take the hit you might expect.”

The dollar dropped on speculation that the Federal Reserve will lower interest rates a third time this year, which prompted investors to buy energy and metals futures. Royal Dutch Shell Plc reported a fire at an oil-sands crude production plant in Alberta, potentially cutting shipments to U.S. refineries.

Crude oil for January delivery rose as much as 51 cents to $98.54 a barrel and was trading at $98.39 at 6:13 p.m. in overnight electronic trading on the New York Mercantile Exchange. The Nymex trading day ended at 5:15 p.m. New York time, and trading for Nov. 21 began at 6 p.m.

Futures rose $3.39, or 3.6 percent, to $98.03 a barrel at 2:45 p.m. on the New York Mercantile Exchange. It was the highest close since trading began in 1983. Futures touched $98.62, matching the intraday record reached on Nov. 7.

Brent crude oil for January settlement rose $3.21, or 3.5 percent, to close at a record $95.49 a barrel on the London- based ICE Futures Europe exchange. Brent reached $95.75 a barrel on today, the highest since trading began in 1988. “There’s an assumption the Fed will run to the rescue and cut rates,” said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. “An unintended result of the rate cuts has been oil approaching $100.”

`Worthless Paper’

Saudi Arabian officials rejected a suggestion by Iran and Venezuela to discuss ending the practice of pricing crude in dollars at an Organization of Petroleum Exporting Countries summit in Riyadh, Saudi Arabia, last weekend.

“They get our oil and give us a worthless piece of paper,” said Iranian President Mahmoud Ahmadinejad on Nov. 18 in Riyadh. “The dollar has no economic value.”

The dollar touched $1.482 per euro today, the lowest since the 13-nation currency was started in 1999. In U.S. dollars, West Texas Intermediate, the New York-traded crude-oil benchmark, is up 61 percent so far this year. Oil is up 43 percent in euros, 52 percent in British pounds and 48 percent in yen.

“The only thing that will deter buyers is a surprise in tomorrow’s inventory report,” said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. “The dollar is boosting prices today. Talk that OPEC might ditch the dollar doesn’t help and neither does speculation that the Fed may lower rates even further.”

U.S. Inventories

An Energy Department report tomorrow is expected to show that U.S. crude-oil inventories rose 750,000 barrels last week, according to the median of 16 responses from analysts in a Bloomberg News survey. Gasoline stockpiles climbed and supplies of distillate fuel, a category that includes heating oil and diesel, fell, according to the survey.

There will be no floor trading in New York on Nov. 22 because of the Thanksgiving holiday.

“I think we are seeing an over-reaction to the drop last week,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “There’s nervousness about the dollar and inventories. I wouldn’t take this too seriously because volume is down on the Tuesday before Thanksgiving.”

Prices dropped 1.3 percent last week, only the second weekly decline since August. Crude oil fell more than $3 on Nov. 13 when December options expired.

Options

Bets that January crude oil won’t fall below $91 a barrel and will rise above $100 a barrel were the two most active options contracts on the Nymex today.

January $91 put contracts, which represent the right to sell oil at that price, fell 59 cents to 85 cents, or $850 per contract, according to data compiled by Bloomberg. One options contract is for 1,000 barrels of oil.

January $100 call options, representing the right to buy oil at that value, more than doubled to $2.35 a barrel, or $2,350 per contract, from $1.12 a barrel yesterday.

Heating oil for December delivery rose 8.59 cents, or 3.3 percent, to $2.6901 a gallon in New York, a record close. Futures touched a record intraday price of $2.7018 a gallon today. Gasoline for December delivery rose 6.99 cents, or 2.9 percent, to close at $2.4515 a gallon.

OPEC is scheduled to discuss production targets at a meeting on Dec. 5.

Alberta Fire

The fire in Canada occurred at the Scotford Upgrader’s residue hydroconversion unit at about 4 p.m. local time yesterday and was extinguished within an hour, Shell Canada said. No injuries were reported. The Alberta Energy & Utilities Board said on its Web site it was investigating the incident.

The “majority” of the plant’s daily output of 155,000 barrels of bitumen was halted, plant spokesman Randy Provencal said in an interview today without elaborating.

Energy shares led by Exxon Mobil Corp. surged with futures prices. Exxon, the world’s largest oil company, climbed $3.71 to $87.82. Chevron Corp., the second-largest U.S. oil company, rose $2.87 to $87.90.

Fed Pares Growth Forecast, Calls October Cut `Close’

Nov. 20 — Federal Reserve policy makers lowered their growth forecast in October and expressed concern about credit-market losses, even as they described the interest- rate cut as a “close call.”

“Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity,” according to minutes of the Federal Open Market Committee’s Oct. 30-31 meeting. “Many members noted that this policy decision was a close call.”

Records of the gathering, which buttressed speculation that the Fed will reduce borrowing costs again next month, were accompanied by estimates and phrases that highlighted risks to growth. The language contrasted with the October statement, which said the dangers of a slower expansion and faster inflation were “roughly” equal.

“This does not sound like a close call to us, more of a no-brainer,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. “We can be pretty sure that if the outlook continues to deteriorate and markets remained distressed, they’ll be easing again soon enough.”

Federal funds futures quoted on the Chicago Board of Trade at 5 p.m. in New York indicated an 82 percent chance of a quarter-point rate cut on Dec. 11, and 70 percent odds of a further move on Jan. 30.

Stocks Gain

Ten-year Treasury notes yielded 4.10 percent, from 4.07 percent late yesterday, while the dollar remained lower. Stocks rebounded from three-month lows, led by oil and technology companies. The Standard & Poor’s 500 Index added 6.43, or 0.5 percent, to 1,439.70.

FOMC members predicted growth could slow next year to as low as 1.8 percent, according to the middle range of forecasts. The numbers are “notably below” the 2.5 percent to 2.75 percent anticipated in June, the Fed said.

Inflation, as measured by the personal consumption expenditures price index excluding food and energy, will be 1.7 percent to 1.9 percent, down from 1.75 percent to 2 percent.

“Most participants judged that the uncertainty attending their October projections for real gross domestic product growth was above typical levels seen in the past,” the Fed said. “In contrast, the uncertainty attached to participants’ inflation projections was generally viewed as being broadly in line with past experience.”

Forecasting Overhaul

The projections, provided as an addendum to the minutes, are the product of a 1 1/2-year review of Fed communication that Chairman Ben S. Bernanke initiated to improve the public’s understanding of policy makers’ objectives.

The FOMC reduced the benchmark rate by a quarter-point on Oct. 31, to 4.5 percent, after a half-point move in September. Kansas City Federal Reserve Bank President Thomas Hoenig dissented, preferring no change. The minutes say Hoenig felt “that policy needed to be slightly firm to better hold inflation in check.”

Fed officials have faced a challenge from financial markets on their neutral outlook for policy.

Traders are betting that year-end funding strains among banks and brokers will curtail lending and slow growth. Analysts predict that writedowns by banks and securities firms, already $50 billion worldwide, will continue to rise as losses mount on securities linked with subprime U.S. mortgages.

“Credit is shutting down to many sectors of the economy,” said James Glassman, senior economist at JPMorgan Chase & Co. in New York. “The Fed needs to adopt an accommodative stance.”

Financial Stability

The minutes contain several references to policy makers’ concerns about financial stability, which they said could affect the outlook for growth.

“Participants generally viewed financial markets as still fragile and were concerned that an adverse shock — such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses — could further dent investor confidence and significantly increase the downside risks to the economy,” the minutes said.

Yields on two-year Treasury notes touched 3.12 percent yesterday, the lowest since January 2005, as investors sought a haven in government debt.

The minutes showed that policy makers paying close attention to surveys and anecdotes that might indicate a turn in sentiment. Consumer spending should “continue to advance at a moderate rate” supported by income gains, the minutes said, while there was a risk that weaker home prices could “further sap consumer confidence.”

Construction Slump

Fed officials have said they expect job growth, record exports and business spending will help sustain the expansion through the recession in housing. Government figures today showed no sign of a bottom for homebuilding, as residential construction permits slumped to their lowest level since 1993.

Bernanke told congressional lawmakers at a Nov. 8 hearing the Fed expected “a more reasonable growth pace” by the U.S. spring of next year. Fed Governor Randall Kroszner said Nov. 16 that data confirming a “rough patch during the next year” would not “by themselves suggest to me that the current stance of monetary policy is inappropriate.”

Fed policy makers have sought to limit the risks to growth while preventing a jump in expectations for inflation. The central bank’s preferred gauge of consumer prices, which excludes food and energy costs, rose 1.8 percent in September from a year ago. Officials are wary of any pass-through from soaring energy and commodity costs and a falling dollar.

“The easing of policy at this meeting seemed unlikely to affect adversely the outlook for inflation,” the minutes said. “A number of members noted that the recent policy moves could readily be reversed if circumstances evolved in a manner that would warrant such action.”

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