@freddiemac $FNMA

Freddie Mac.

Freddie Mac reported earnings yesterday, and they were down 95 percent relative to the fourth quarter of last year. This is because Freddie Mac, as a thing that buys mortgages, is naturally long lots and lots of interest-rate duration, so when interest rates decline, as they did in the fourth quarter, the value of its portfolio goes up. Which sounds good, right? But it also has a bunch of derivatives to hedge that interest-rate risk, and when interest rates decline, the value of its derivatives goes down. The derivatives are marked to market in income; the portfolio is not. So when Freddie's portfolio increases in value, its accounting income goes down; when it decreases in value, its income goes up. Last quarter its portfolio got more valuable, so its income was way down.

The low income means that Freddie Mac will pay only $851 million in dividends to the Treasury, and John Carney points out that that's much less than the $1.8 billion that it would be paying if the government hadn't controversially amended the terms of its bailout in 2012. Before that amendment, Treasury took a 10 percent dividend on its preferred stock, and loaned Freddie more money if it didn't have enough money; after the amendment, it just takes whatever Freddie makes and leaves nothing for shareholders. That meant huge dividends in 2013, when Freddie had accounting gains for reversing a write-off of its deferred tax assets, and lower dividends now, when it has accounting losses for those derivatives losses. Both of those things, though, were basically uneconomic; neither had much to do with the actual economic results of Freddie's business. Freddie is a pure creature of arbitrary accounting, as most financial institutions are, but unlike most institutions it is forced to pay out tons of actual cash based on that arbitrary accounting.