Is Freddie Mac next in GSE management shake-up?

By Julie Haviv - analysis

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: Quote, Profile, Research, Stock Buzz) 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: Quote, Profile, Research, Stock Buzz), 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.  Continued...