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Last updated: August 6, 2008 11:22 pm

Fred bare

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If Hank Paulson ever does decide to buy into Freddie Mac, he should not expect too much in the way of dividends. The government-sponsored enterprise has slashed its quarterly dividend again – to 5 cents or less.

Why, though, does Freddie continue to pay even a nickel on its common stock? At this stage in the game, with Washington’s backing having switched from nods and winks to explicit support, the psychological benefits of maintaining even a derisory dividend are moot to say the least.

Similarly muddled thinking was on display in Freddie’s assertion that it stood ready to raise an additional $5.5bn of equity immediately, but felt this was not the right time to do so for its shareholders’ sakes. It is undoubtedly right on that narrow criterion, with the market capitalisation standing currently at $4.6bn. However, with Freddie having pulled off the stunning feat of reporting second-quarter results below even Wall Street’s bombed-out expectations, a capital infusion of some sort is a necessity. Not doing so appears to be more a question of “can’t” rather than “won’t”.

The dividend cut saves roughly $500m a year. Freddie also opened the box on its subprime and Alt-A mortgage exposure, writing down their value for the first time. This all shows willing in terms of facing up to the crisis in the US housing market. However, alongside Freddie’s deteriorating outlook for house prices and delinquencies, the message is one of battening down ever more hatches as the forecast worsens. It has given up trying to project credit losses on its portfolio because it keeps having to play catch-up.

For any mainstream investor, Freddie is a non-starter. Yet its dominant position, alongside Fannie Mae, in the tottering US housing market, makes it indispensable in the eyes of Washington. It is looking ever more likely that the Treasury secretary will have to put taxpayers’ money where his mouth his.

Freddie Mac slashes its dividend - but why not cut it altogether?

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