Federal Home Loan Mortgage Corporation, better known as Freddie Mac, is a name synonymous with the 2008 housing crisis. A government-sponsored enterprise designed to provide liquidity to the mortgage market, Freddie Mac found itself at the heart of the subprime mortgage meltdown, ultimately requiring a massive bailout and becoming a ward of the state. Today, its common stock (FREJP) trades on the OTCQB, a market for early-stage and developing companies, a far cry from its former glory on the NYSE.

While most investors have written off Freddie Mac as a relic of a bygone era, a deeper dive into its recent financial data reveals a curious anomaly. Despite its "penny stock" status and a market cap that many platforms list as "-1" (essentially, nonexistent), Freddie Mac's balance sheet tells a different story. A story of hidden value, of a sleeping giant, of a ghost in the mortgage machine, if you will.

The most recent quarterly report (as of March 31, 2024) shows Freddie Mac holding a staggering $3.28 trillion in assets. Yes, trillion with a "T." To put this in perspective, that's larger than the GDP of many countries. While liabilities also run high at $3.23 trillion, the company still boasts a shareholder equity of $50.4 billion.

This raises the first eyebrow-raising question: how can a company with over $50 billion in shareholder equity have a virtually non-existent market cap? The answer lies in the unique circumstances of Freddie Mac's conservatorship. The government essentially owns all of the company's common stock, acquired during the bailout. This stock is not actively traded and therefore doesn't contribute to the calculated market cap.

But here's where things get really interesting. While the common stock is effectively "dead," Freddie Mac also has preferred stock outstanding, specifically the "Senior Preferred Stock Purchase Agreement" with the U.S. Treasury. This agreement, stemming from the bailout, requires Freddie Mac to pay dividends to the Treasury, effectively funneling its profits back to the government.

Now, let's look at the numbers. In 2023, Freddie Mac reported a net income of $10.5 billion. This substantial profit, however, is almost entirely swallowed by the dividend obligations to the Treasury. This dynamic effectively keeps the company in a state of suspended animation, unable to truly benefit from its massive asset base and strong earnings.

But what if this situation were to change?

Hypothesis:

If Freddie Mac were to be released from conservatorship, even partially, the value of its common stock would be unlocked, potentially leading to a market cap that reflects its true financial standing. A market cap that could easily surpass $100 billion, based on its current equity and earnings power.

This, of course, is not just a financial calculation, but a political question. The future of Freddie Mac and its fellow GSE, Fannie Mae, is a subject of ongoing debate in Washington. Some argue for their privatization, while others advocate for continued government control.

Freddie Mac's Financial Performance (2019-2023)

For investors, Freddie Mac represents a fascinating case study: a company with immense underlying value, trapped in a web of government intervention. Whether the ghost in the mortgage machine will ever be fully released remains to be seen. But the potential is there, a billion-dollar secret waiting to be unlocked.

"Fun Fact: Freddie Mac, originally an acronym for the Federal Home Loan Mortgage Corporation, officially changed its name to Freddie Mac in 1996, recognizing the power of its brand recognition and the colloquial name it had adopted."