netrashetty
Netra Shetty
Headquartered in California, LeapFrog Enterprises (LF) is a leading provider of technology-based learning products and proprietary content.
Business and Financials
The company designs and develops educational products, as well as related interactive software and content, under multiple product platforms, including the LeapFrog, LeapPad, Leapster, and Quantum Leap brands. The company's product lines include (1) learning platforms (affordable hardware devices), (2) educational software-based content (interactive books and cartridges), and (3) stand-alone educational products. The products are sold through national, regional, and specialty retailers in the U.S. and are distributed in over 25 countries worldwide. In addition to home use, LeapFrog also develops instructional materials for classroom use through its SchoolHouse division.
LeapFrog operates in three business segments: (1) U.S. Consumer, (2) International, and (3) Education and Training. In the U.S. Consumer segment, the company markets and sells its products directly to national and regional mass-market and specialty retailers as well as to other retail stores through sales representatives. In the International division, the company sells its products outside the U.S. directly to retailers and through various distribution and strategic arrangements. The Education and Training division is focused on the pre-kindergarten through 8th grade school market in the United States and sells directly to educational institutions, teacher supply stores, and educational product catalogs. In 2006, the U.S. Consumer segment accounted for 70% of the company's net sales. The International segment and SchoolHouse division (the Education and Training segment) accounted for 23% and 7% of net sales, respectively.
LeapFrog's (LF) second-quarter net loss was $20.6 million, or 32 cents per share, compared with a year-earlier loss of $28 million, or 44 cents per share. Sales rose 22% to $68.3 million, boosted by the Tag reading system and gaming systems Leapster2 and Didj
Freddie Mac is one of two mortgage giants established by the U.S. federal government to provide liquidity in the secondary mortgage market, along with sister company Fannie Mae (FNM). Freddie buys mortgages from banks and other financial institutions and packages them into bonds called mortgage-backed securities (MBS), which it sells to investors of all sizes. Freddie was structured to play a dominant role in the secondary mortgage market and ensure a steady and reliable supply of funds for U.S. homebuyers. In August 2008, the U.S. federal government's implicit backing of Freddie Mac became explicit, with Treasury Secretary Henry Paulson announcing that Congress had approved a plan giving the Treasury the authority to bail out Freddie if its capital levels dipped too low.[1]
On September 8, 2008, investors' fears were realized when Paulson announced a comprehensive plan to take Freddie and Fannie under "conservatorship", essentially placing the companies under government control and giving the Treasury the right to pump as much as $100 billion into each company, as well as buy a 79.9% share of both Freddie and Fannie.[2]
On June 16, 2010 Freddie Mac announced it will be delisting from the New York Stock Exchange (NYSE) because it failed to meet exchange requirements.[3] A company is forced to delist from the NYSE if the company's average stock price falls below the required $1.00 share price for over 30 days. While Freddie Mac was able to meet this requirement, its sister company Fannie Mae's did not. As a result, the Federal Housing Finance Agency (Fannie Mae and Freddie Mac's regulator) had both of them delist. Going forward, Freddie Mac's stock will be traded over the counter (OTC) under the ticker FMCC.
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 Investments
1.2.2 Single Family Guarantee
1.2.3 Multifamily
2 Trends and Forces
2.1 Future government support of Freddie Mac is unclear
2.2 Subprime fallout diminishing demand for mortgage-backed securities
2.3 Housing slump decreasing new mortgage originations
3 Competition
4 References
The Mortgage Bankers Association has since urged the Federal Government to place both Fannie Mae and Freddie Mac into "receivership", the next step past its current "conservatorship". Right now the government controls 79.9% of Fannie Mae and Freddie Mac, with 80% being the threshold for placing them on the federal books. Conservatorship is intended for firms that could be restored to health, while receivership is the end-of-the-line liquidation phase. Depending on the accounting measures used, it is estimated that Fannie Mae and Freddie Mac could end up costing the Federal Government $53 billion or save the government $44 billion.[4] Freddie has also begun lobbying the Treasury to reduce its dividend payments on the preferred shares the Treasury owns.[5] This would help Freddie Mac help pay back some of the funds it owes, and it also allows it to begin restructuring by reducing the amount of preferred shares the government owns.
For the third quarter of 2010, Freddie Mac posted a $4.1 billion third-quarter net loss, and required another infusion from the Treasury to maintain positive net worth.[6] The net loss was actually less than the previous quarter, which had a $6 billion net loss. However, $1.6 billion of the loss was due to a preferred dividend on the preferred shares purchased by the Treasury.[6]
Company Overview
Freddie Mac is a Government Sponsored Enterprise (GSE), a hybridized enterprise endowed with an advantageous set of special privileges. It is a non-bank financial institution created by the U.S. federal government in 1938 and given a range of special privileges, including exemption from state and local taxes, a $2.25 billion line of credit with the U.S. Treasury, and the implicit backing of the federal government.[7] Freddie Mac's business model is that it earns income from the mortgages it owns, using some of it to pay interest on its mortgage backed securities (MBS); rising default and foreclosure rates, however, meant that more and more of its mortgages weren't generating any income at all, forcing the company to write these mortgages off as losses on its income statement.
The purpose of Freddie Mac is to make it easier for Americans to own a home. Freddie Mac accomplishes this goal by expanding the supply of funds available for mortgages. For example, when a bank lends out a mortgage, it normally has to wait until the loan is repaid before lending the funds out again. Freddie Mac, however, steps in and buys out the mortgage from the bank, allowing the bank to make a second loan sooner; Freddie Mac meanwhile earns the interest from the mortgage. Freddie Mac also sells bonds tied to the mortgages, called mortgage-backed securities. While the mortgage might not be repaid, Fannie Mae guarantees full repayment of its bonds, allowing Fannie Mae to charge a security premium.
Together, Fannie Mae and Freddie Mac (FRE) hold approximately $5.3 trillion of the $12 trillion total in U.S. residential mortgage debt as of August 4, 2009.[8] Because of this high concentration, many thought a failure at Fannie Mae would wreak havoc in the residential housing market and the economy as a whole because many other large financial institutions held Fannie Mae bonds. Although the government was not obligated to assist Fannie Mae, the potential mayhem caused by Fannie's demise is what many believe led the to government ensure Fannie Mae's continued viability.
On December 24, 2009, The U.S. Treasury Department uncapped the credit line given to Fannie Mae and Freddie Mac for three years, essentially guaranteeing that the companies will survive and eliminating uncertainty about continued government support.[9]
Business and Financial Metrics
In 2009, Freddie Mac had a net loss of $21.6 billion, a decline from its 2008 net loss of $50.1 billion. This decline is loss is attributed to a number of reasons. First, net interest income increased significantly from $6.8 billion in 2008 to $17.1 billion in 2009 as Freddie Mac was able to take advantage of lower interest rates by replacing previously higher debt and interest payments with lower ones. Secondly, as the economy began to stabilize in 2009, Freddie Mac was able to avoid the huge losses associated with write downs on its investments as the fair value of these assets stabilized as well. Finally, Freddie Mac also saw increases in the fair value of its derivatives, which significantly reversed course from its 2008 losses related to derivatives.[10]
FRE Financials (In Millions) 2006[11]' 2007[12] 2008[12] 2009[12]
Net Interest Income 3,412 3,099 6,796 17,073
Non-Interest Income 1,679 -275 -29,175 -2,732
Non-Interest Expense -2,809 -8,801 -22,190 -36,725
Net Income 2,327 -3,094 -50,119 -21,553
Business Segments
Freddie Mac breaks its business operations into three reportable segments: i) Investments, ii) Single Family Guarantee, and iii) Multifamily. Activities that do not fall under any of the three above segments are categorized as an "All Other" category.
Investments
Freddie Mac's Investments segment manages the investments for the broader company, and its roles include debt financing, managing Freddie Mac's interest rate risk, and managing its liquidity and capital positions. It mainly invests in mortgage-related securities and single-family mortgages. For 2009, this segment had a net income of $7.49 billion, a huge turnaround from its 2008 net loss of $27.8 billion.[13] The dramatic turnaround is due to fair value adjustments of its derivative positions as well as its investments; while in 2008 these adjustments totaled $23.6 billion in losses, in 2009 these had a combined $8.4 billion gain.[13]
Single Family Guarantee
Freddie Mac's Single Family Guarantee segment essentially acts as insurance on single family mortgage related securities. In other words, it guarantees the interest and principal payments on these securities in the event of a default, and earns revenues by charging a premium for this guarantee. Total net losses for this segment in 2009 was $23.7 billion, a slight increase from its 2008 loss of $22.3 billion, but a significant increase from its 2007 loss of just $2.4 billion.[14] These losses are driven almost exclusively by large increases in its provision for credit losses, meaning losses associated with mortgage related securities in which Freddie Mac must guarantee because they defaulted.
Multifamily
Freddie Mac's Multifamily segment gaurantees and securitizes multifamily mortgages as well as Commercial Mortgage Backed Securities (CMBS). In 2009, Freddie Mac's Multifamily segment had a net loss of $4.6 billion, compared to a net income of $85 million in 2008.[15] The main driver for the large loss in 2009 is the adjustments to fair value on its investment portfolio, which represented $3.8 billion loss.[15]
Trends and Forces
Future government support of Freddie Mac is unclear
The Obama administration has yet to reach an agreement on whether the U.S. Treasury should provide guarantees for new mortgages once the market stabilizes.[16] The issue is becoming relatively urgent because of a January deadline for that the Treasury Department must meet with a recommendation for the future of the U.S. housing finance system. Some top experts are in favor of an explicit but limited Federal guarantee of mortgages, while others believe this exposes the government to too much risk. The ultimate recommendation by the Treasury Department may hold significant importance to Freddie Mac's future.
Subprime fallout diminishing demand for mortgage-backed securities
The 2007 collapse of the U.S. subprime mortgage market has led to a decreased demand for mortgage-backed securities (MBS), which has hurt Freddie Mac’s ability to issue and sell its bonds. With the default rates on adjustable-rate subprime mortgages as high as 8%,[17] the demand for securities backed by these mortgages has turned investors away, since there is a fear the bonds might not be repaid. These MBS’s form the base of Freddie’s business, as much of its cash flow is generated by revenue from the sale of these bonds. When demand for its bonds falls, the sale price for these bonds fall, putting Freddie Mac in the position of having to either sell the bonds at a lower price or hold onto them until times improve. In the meantime, the securities that Freddie can’t or chooses not to sell have seen their values decline as the market demand for them falls.
Housing slump decreasing new mortgage originations
Freddie Mac’s business depends on a steady supply of new mortgages to purchase and repackage into securities; since the 2007 slump in the U.S. housing market, this supply has diminished. With fewer mortgages to purchase from banks and lenders, Freddie would see a decrease in the volume of its business for the duration of the slump. In general, downturns in the housing market lead to fewer mortgage originations, which, in turn, leads to fewer mortgages that Freddie can purchase. Additionally, housing slumps often lead to a decline in residential real estate prices, meaning that the properties backing mortgages are worth less; any homes Freddie repossesses will be worth less than before, possibly even less than Freddie paid for the mortgage originally. The same applies in reverse, however. Housing booms lead to higher mortgage originations and higher home prices, all of which can boost Freddie’s business.
Competition
Because of Freddie Mac's relatively specific purpose and its GSE status, comparisons to other corporations are difficult to make. The best comparison would be to its sister company, Fannie Mae (FNM). Both have similar charters, are similar in size, and both hold status as GSEs.
Fannie Mae (FNM) is slightly larger than Freddie Mac, with approximately $3.2 trillion in mortgages and other guarantees as of the end of 2009.[18] In 2009 Fannie Mae had $14.5 billion in net interest income and $7.2 billion guaranty fee income[19]; however, it had large and significant losses related to its derivative products as well as credit expenses related to defaulting Mortgage Backed Securities Fannie Mae sold. These losses totaled $73.3 billion in 2009, contributing heavily to its 2009 net loss of $72 billion.[20]
2009 Financials (In Billions) Fannie Mae (FNM)[21] Freddie Mac (FRE)[12]
Net Interest Income 14,510 17,073
Non-Interest Income -10,290 -2,732
Total Expenses 77,227 -36,725
Net Income -72,022 -21,553
Business and Financials
The company designs and develops educational products, as well as related interactive software and content, under multiple product platforms, including the LeapFrog, LeapPad, Leapster, and Quantum Leap brands. The company's product lines include (1) learning platforms (affordable hardware devices), (2) educational software-based content (interactive books and cartridges), and (3) stand-alone educational products. The products are sold through national, regional, and specialty retailers in the U.S. and are distributed in over 25 countries worldwide. In addition to home use, LeapFrog also develops instructional materials for classroom use through its SchoolHouse division.
LeapFrog operates in three business segments: (1) U.S. Consumer, (2) International, and (3) Education and Training. In the U.S. Consumer segment, the company markets and sells its products directly to national and regional mass-market and specialty retailers as well as to other retail stores through sales representatives. In the International division, the company sells its products outside the U.S. directly to retailers and through various distribution and strategic arrangements. The Education and Training division is focused on the pre-kindergarten through 8th grade school market in the United States and sells directly to educational institutions, teacher supply stores, and educational product catalogs. In 2006, the U.S. Consumer segment accounted for 70% of the company's net sales. The International segment and SchoolHouse division (the Education and Training segment) accounted for 23% and 7% of net sales, respectively.
LeapFrog's (LF) second-quarter net loss was $20.6 million, or 32 cents per share, compared with a year-earlier loss of $28 million, or 44 cents per share. Sales rose 22% to $68.3 million, boosted by the Tag reading system and gaming systems Leapster2 and Didj
Freddie Mac is one of two mortgage giants established by the U.S. federal government to provide liquidity in the secondary mortgage market, along with sister company Fannie Mae (FNM). Freddie buys mortgages from banks and other financial institutions and packages them into bonds called mortgage-backed securities (MBS), which it sells to investors of all sizes. Freddie was structured to play a dominant role in the secondary mortgage market and ensure a steady and reliable supply of funds for U.S. homebuyers. In August 2008, the U.S. federal government's implicit backing of Freddie Mac became explicit, with Treasury Secretary Henry Paulson announcing that Congress had approved a plan giving the Treasury the authority to bail out Freddie if its capital levels dipped too low.[1]
On September 8, 2008, investors' fears were realized when Paulson announced a comprehensive plan to take Freddie and Fannie under "conservatorship", essentially placing the companies under government control and giving the Treasury the right to pump as much as $100 billion into each company, as well as buy a 79.9% share of both Freddie and Fannie.[2]
On June 16, 2010 Freddie Mac announced it will be delisting from the New York Stock Exchange (NYSE) because it failed to meet exchange requirements.[3] A company is forced to delist from the NYSE if the company's average stock price falls below the required $1.00 share price for over 30 days. While Freddie Mac was able to meet this requirement, its sister company Fannie Mae's did not. As a result, the Federal Housing Finance Agency (Fannie Mae and Freddie Mac's regulator) had both of them delist. Going forward, Freddie Mac's stock will be traded over the counter (OTC) under the ticker FMCC.
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 Investments
1.2.2 Single Family Guarantee
1.2.3 Multifamily
2 Trends and Forces
2.1 Future government support of Freddie Mac is unclear
2.2 Subprime fallout diminishing demand for mortgage-backed securities
2.3 Housing slump decreasing new mortgage originations
3 Competition
4 References
The Mortgage Bankers Association has since urged the Federal Government to place both Fannie Mae and Freddie Mac into "receivership", the next step past its current "conservatorship". Right now the government controls 79.9% of Fannie Mae and Freddie Mac, with 80% being the threshold for placing them on the federal books. Conservatorship is intended for firms that could be restored to health, while receivership is the end-of-the-line liquidation phase. Depending on the accounting measures used, it is estimated that Fannie Mae and Freddie Mac could end up costing the Federal Government $53 billion or save the government $44 billion.[4] Freddie has also begun lobbying the Treasury to reduce its dividend payments on the preferred shares the Treasury owns.[5] This would help Freddie Mac help pay back some of the funds it owes, and it also allows it to begin restructuring by reducing the amount of preferred shares the government owns.
For the third quarter of 2010, Freddie Mac posted a $4.1 billion third-quarter net loss, and required another infusion from the Treasury to maintain positive net worth.[6] The net loss was actually less than the previous quarter, which had a $6 billion net loss. However, $1.6 billion of the loss was due to a preferred dividend on the preferred shares purchased by the Treasury.[6]
Company Overview
Freddie Mac is a Government Sponsored Enterprise (GSE), a hybridized enterprise endowed with an advantageous set of special privileges. It is a non-bank financial institution created by the U.S. federal government in 1938 and given a range of special privileges, including exemption from state and local taxes, a $2.25 billion line of credit with the U.S. Treasury, and the implicit backing of the federal government.[7] Freddie Mac's business model is that it earns income from the mortgages it owns, using some of it to pay interest on its mortgage backed securities (MBS); rising default and foreclosure rates, however, meant that more and more of its mortgages weren't generating any income at all, forcing the company to write these mortgages off as losses on its income statement.
The purpose of Freddie Mac is to make it easier for Americans to own a home. Freddie Mac accomplishes this goal by expanding the supply of funds available for mortgages. For example, when a bank lends out a mortgage, it normally has to wait until the loan is repaid before lending the funds out again. Freddie Mac, however, steps in and buys out the mortgage from the bank, allowing the bank to make a second loan sooner; Freddie Mac meanwhile earns the interest from the mortgage. Freddie Mac also sells bonds tied to the mortgages, called mortgage-backed securities. While the mortgage might not be repaid, Fannie Mae guarantees full repayment of its bonds, allowing Fannie Mae to charge a security premium.
Together, Fannie Mae and Freddie Mac (FRE) hold approximately $5.3 trillion of the $12 trillion total in U.S. residential mortgage debt as of August 4, 2009.[8] Because of this high concentration, many thought a failure at Fannie Mae would wreak havoc in the residential housing market and the economy as a whole because many other large financial institutions held Fannie Mae bonds. Although the government was not obligated to assist Fannie Mae, the potential mayhem caused by Fannie's demise is what many believe led the to government ensure Fannie Mae's continued viability.
On December 24, 2009, The U.S. Treasury Department uncapped the credit line given to Fannie Mae and Freddie Mac for three years, essentially guaranteeing that the companies will survive and eliminating uncertainty about continued government support.[9]
Business and Financial Metrics
In 2009, Freddie Mac had a net loss of $21.6 billion, a decline from its 2008 net loss of $50.1 billion. This decline is loss is attributed to a number of reasons. First, net interest income increased significantly from $6.8 billion in 2008 to $17.1 billion in 2009 as Freddie Mac was able to take advantage of lower interest rates by replacing previously higher debt and interest payments with lower ones. Secondly, as the economy began to stabilize in 2009, Freddie Mac was able to avoid the huge losses associated with write downs on its investments as the fair value of these assets stabilized as well. Finally, Freddie Mac also saw increases in the fair value of its derivatives, which significantly reversed course from its 2008 losses related to derivatives.[10]
FRE Financials (In Millions) 2006[11]' 2007[12] 2008[12] 2009[12]
Net Interest Income 3,412 3,099 6,796 17,073
Non-Interest Income 1,679 -275 -29,175 -2,732
Non-Interest Expense -2,809 -8,801 -22,190 -36,725
Net Income 2,327 -3,094 -50,119 -21,553
Business Segments
Freddie Mac breaks its business operations into three reportable segments: i) Investments, ii) Single Family Guarantee, and iii) Multifamily. Activities that do not fall under any of the three above segments are categorized as an "All Other" category.
Investments
Freddie Mac's Investments segment manages the investments for the broader company, and its roles include debt financing, managing Freddie Mac's interest rate risk, and managing its liquidity and capital positions. It mainly invests in mortgage-related securities and single-family mortgages. For 2009, this segment had a net income of $7.49 billion, a huge turnaround from its 2008 net loss of $27.8 billion.[13] The dramatic turnaround is due to fair value adjustments of its derivative positions as well as its investments; while in 2008 these adjustments totaled $23.6 billion in losses, in 2009 these had a combined $8.4 billion gain.[13]
Single Family Guarantee
Freddie Mac's Single Family Guarantee segment essentially acts as insurance on single family mortgage related securities. In other words, it guarantees the interest and principal payments on these securities in the event of a default, and earns revenues by charging a premium for this guarantee. Total net losses for this segment in 2009 was $23.7 billion, a slight increase from its 2008 loss of $22.3 billion, but a significant increase from its 2007 loss of just $2.4 billion.[14] These losses are driven almost exclusively by large increases in its provision for credit losses, meaning losses associated with mortgage related securities in which Freddie Mac must guarantee because they defaulted.
Multifamily
Freddie Mac's Multifamily segment gaurantees and securitizes multifamily mortgages as well as Commercial Mortgage Backed Securities (CMBS). In 2009, Freddie Mac's Multifamily segment had a net loss of $4.6 billion, compared to a net income of $85 million in 2008.[15] The main driver for the large loss in 2009 is the adjustments to fair value on its investment portfolio, which represented $3.8 billion loss.[15]
Trends and Forces
Future government support of Freddie Mac is unclear
The Obama administration has yet to reach an agreement on whether the U.S. Treasury should provide guarantees for new mortgages once the market stabilizes.[16] The issue is becoming relatively urgent because of a January deadline for that the Treasury Department must meet with a recommendation for the future of the U.S. housing finance system. Some top experts are in favor of an explicit but limited Federal guarantee of mortgages, while others believe this exposes the government to too much risk. The ultimate recommendation by the Treasury Department may hold significant importance to Freddie Mac's future.
Subprime fallout diminishing demand for mortgage-backed securities
The 2007 collapse of the U.S. subprime mortgage market has led to a decreased demand for mortgage-backed securities (MBS), which has hurt Freddie Mac’s ability to issue and sell its bonds. With the default rates on adjustable-rate subprime mortgages as high as 8%,[17] the demand for securities backed by these mortgages has turned investors away, since there is a fear the bonds might not be repaid. These MBS’s form the base of Freddie’s business, as much of its cash flow is generated by revenue from the sale of these bonds. When demand for its bonds falls, the sale price for these bonds fall, putting Freddie Mac in the position of having to either sell the bonds at a lower price or hold onto them until times improve. In the meantime, the securities that Freddie can’t or chooses not to sell have seen their values decline as the market demand for them falls.
Housing slump decreasing new mortgage originations
Freddie Mac’s business depends on a steady supply of new mortgages to purchase and repackage into securities; since the 2007 slump in the U.S. housing market, this supply has diminished. With fewer mortgages to purchase from banks and lenders, Freddie would see a decrease in the volume of its business for the duration of the slump. In general, downturns in the housing market lead to fewer mortgage originations, which, in turn, leads to fewer mortgages that Freddie can purchase. Additionally, housing slumps often lead to a decline in residential real estate prices, meaning that the properties backing mortgages are worth less; any homes Freddie repossesses will be worth less than before, possibly even less than Freddie paid for the mortgage originally. The same applies in reverse, however. Housing booms lead to higher mortgage originations and higher home prices, all of which can boost Freddie’s business.
Competition
Because of Freddie Mac's relatively specific purpose and its GSE status, comparisons to other corporations are difficult to make. The best comparison would be to its sister company, Fannie Mae (FNM). Both have similar charters, are similar in size, and both hold status as GSEs.
Fannie Mae (FNM) is slightly larger than Freddie Mac, with approximately $3.2 trillion in mortgages and other guarantees as of the end of 2009.[18] In 2009 Fannie Mae had $14.5 billion in net interest income and $7.2 billion guaranty fee income[19]; however, it had large and significant losses related to its derivative products as well as credit expenses related to defaulting Mortgage Backed Securities Fannie Mae sold. These losses totaled $73.3 billion in 2009, contributing heavily to its 2009 net loss of $72 billion.[20]
2009 Financials (In Billions) Fannie Mae (FNM)[21] Freddie Mac (FRE)[12]
Net Interest Income 14,510 17,073
Non-Interest Income -10,290 -2,732
Total Expenses 77,227 -36,725
Net Income -72,022 -21,553