Freddie Mac Unit’s Closure Seen as Appeasement Move

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The New York Sun

In a move that analysts took as a sign that Freddie Mac has decided it has pushed its luck far enough with Wall Street, America’s second-largest mortgage guarantor announced yesterday it is shuttering its Securities Sales & Trading Group subsidiary.


SSTG, as the boutique broker dealer is known, has always been a thorn in the side of major bond brokers but recently became more of a potential liability than its $100 million a year in revenue was worth.


Analysts took the news of the closing of SSTG – which specializes in trading Freddie Mac backed mortgage bonds with institutional clients – as a sign that Freddie Mac also wants to avoid the type of scrutiny under which Fannie Mae, Freddie’s larger rival, now finds itself.


Fannie Mae was accused last week by its regulator of hiding billions of dollars worth of losses using questionable accounting methods.


SSTG, while virtually unknown to the public, occupied a profitable niche on Wall Street in the $1 trillion market for Freddie Mac backed mortgage bonds. SSTG was ostensibly set up in the early 1990s to help broaden the distribution of Freddie bonds, primarily to smaller institutional accounts.


Wall Street bond executives, however, considered SSTG competition plain and simple.


“SSTG was set up to tap a niche market in areas where the Street was not going to focus its resources, period,” said a former SSTG executive, now a senior executive at a Wall Street firm, who asked to remain anonymous. While SSTG covered a spectrum of institutional accounts, it concentrated primarily on smaller mortgage investors that are traditionally less covered by Wall Street salesmen. As Wall Street’s bond business slowed this year, however, SSTG began to rankle Wall Street sales managers at large firms who viewed SSTG as another competitor in a tightening market.


With changes such as tighter growth limits put on its portfolio and a possible new regulator, Freddie Mac will become less attractive for large Wall Street firms to do business with.


As a result, it will need all the good will it can get going forward.


“Freddie needed friends after their restructuring. $100 million is not enough money to ruin the close relationships they need now,” said a veteran bond salesman.


Moreover, Freddie Mac is also closing SSTG, presumably as part of an ef fort to put its own admitted $4.5 billion accounting scandal behind it.


Freddie Mac in 2003 admitted hiding $4.5 billion in profits.


An investigation into SSTG’s role in Freddie Mac’s accounting woes by the Baker, Botts law firm found SSTG had cooperated in a $2.8 billion sham bond sale to Freddie’s retained portfolio, designed to allow the company to dodge marking the bonds to market. By avoiding the correct valuation, Freddie was able to avoid recognizing profits on the bonds, or as the investigation termed it, “creating volatility” in its earnings. By lowering short-term trading profits, Wall Street analysts and money managers viewed Freddie as more of a steady growth company and bid the stock price up.


Wall Street bond executives unanimously refused to comment on the record to The New York Sun, citing corporate rules against commenting on clients. One of them put his refusal to comment in perspective: “Freddie is one of our largest customers on the Treasury, derivative, agency, swaps, mortgage- and asset-backed and repurchase desks.” He estimated that Freddie is a $30 million account at his firm.


“Today’s actions demonstrate our intention to focus and streamline our business operations so that we execute our mission in the most efficient and effective way possible,” said Freddie Mac chairman Richard Syron, in a statement posted on the company’s Web site.


The New York Sun

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