Freddie Mac talked to investors this week about possibly buying its stock to raise much-needed capital but billionaire investor Warren Buffett said he passed on an opportunity to help the troubled mortgage giant.
The likelihood Freddie will find willing investors took another hit after Moody’s Investors Service lowered the company’s preferred stock ratings and those of sister company Fannie Mae to near junk status.
Shares of the enterprises tumbled in midday trading.
Freddie spokesman Douglas Duvall confirmed to reporters on Friday that the company’s management has been in talks with potential investors this week as part of ongoing discussions to raise capital. He declined to give any details about the meetings, possible investors or structures. The Wall Street Journal reported on the talks on Friday.
Freddie promised in May to raise US$5.5 billion to shore up its finances, but hasn’t yet and its declining share price makes raising that money far less feasible.
Fannie Mae spokeswoman Amy Bonitatibus declined to comment on whether the company was pursuing similar talks.
Buffett acknowledged during a live appearance on CNBC Friday that he had been approached by Freddie and Fannie and passed on getting involved. The timing of the incident was not immediately clear.
Buffett’s company, Berkshire Hathaway Inc, was the largest Freddie shareholder around 2000 and 2001, he said. The company sold its shares after Buffett realized that both companies were trying “to report quarterly earnings to please Wall Street.”
Investors appear to believe existing common stockholders would get nothing if there is a government bailout, a view Buffett also shares. What remains unclear is whether investors in preferred shares — a type of investment that incorporates elements of both stocks and bonds — will also be wiped out.
On Friday, Moody’s cut its ratings on the companies’ preferred stock five notches to “Baa3” from “A1.” A rating of “Baa3” is one notch above junk status. It also put them on review for possible downgrade, saying they each have limited ability to raise equity.
The ratings agency believes that the likelihood of government intervention has risen.
While Freddie’s stock has lost more than half its value this week and Fannie’s is down 37 percent, most observers think that’s not enough to force the government to step in. Only when there’s evidence the companies can’t sell short-term debt is the government likely to intervene, they say.
Treasury Department spokeswoman Jennifer Zuccarelli said on Friday that the department is “staying on top of the situation and communicating regularly with the companies, their regulator, and the Federal Reserve.”
Fannie and Freddie’s shares have lost more than 90 percent of their value this year. On Friday, Fannie Mae fell US$0.30, or 6.2 percent, to US$4.55, and Freddie Mac fell US$0.42, or 13.3 percent, to US$2.74.
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