Richard F. Syron's Speech at Freddie Mac Annual Shareholder Meeting on July 15, 2005
Prepared Remarks for Richard F. Syron
Chairman & Chief Executive Officer, Freddie Mac
Freddie Mac Annual Shareholder Meeting
McLean, Virginia
July 15, 2005
I'm pleased to join you at our third annual shareholder meeting in less
than sixteen months. Next year, however, we should be back to our normal schedule
– meaning only one meeting in a calendar year.
2004 was our first year under the company's new leadership team –
and what began as a year of triage ended with some real progress on a number
of fronts.
- We made significant headway in getting our financial house in order, in
restoring our credibility with Wall Street, and in rebuilding our relationships
with Congress, our regulators and others.
- And in working with Congress, we emphasized that any solution should be
consistent with long term shareholder value.
- We put in place a new senior management team, and moved quickly to reorganize
the business units to achieve greater integration and efficiency in our operations.
- We're eliminating the vertical silos that have been prevalent in
individual businesses, so the company as a whole can operate in a more horizontal
way.
- We increased the fair value of stockholder equity.
- And we took a number of steps to help us fulfill our mission and produce
lasting value for our shareholders.
While much remains to be done, Freddie Mac made significant strides last year.
We continued to improve and strengthen our internal controls. We kept to our
announced schedule to return to timely financial reporting. In fact, in March
of this year, we met our commitment to report our 2004 results. And we have
also taken steps to strengthen corporate governance.
For example, we have had the orderly transition of more than half of our elected
board. In an era when many companies have had difficulty with Board recruiting,
the high quality of our Board is a heartening sign of strong leadership and
oversight for Freddie Mac.
We've also made important advances in fulfilling our mission. As set
forth in our charter, Freddie Mac's mission is to provide liquidity, stability
and affordability to the residential housing market. On the first two, we have
done a very good job. Mortgage money has been widely available under a wide
range of market conditions, and Freddie Mac has played a vital role in keeping
the economy strong.
On affordability, however, I wanted Freddie Mac to do more. And we have. Let
me run through a few facts.
- Last year we financed homes for more than 3.7 million families – and
more than half were low or moderate-income households.
- We reported to HUD that we met all of our affordable housing goals for 2004
– which effectively increased by 14 percent.
- And we made progress in a number of other areas. For instance, we increased
our purchase of loans for first-time homebuyers and minority families.
As minority and immigrant borrowers will account for the majority of new household
growth this decade, we've created a new Mission division focused on addressing
their needs. We've also created new mortgage products that allow for low
down payments for more families.
This new suite of affordable housing products we just rolled out a few months
ago, called Home Possible, is significant because of its broad national market
reach and availability. We expect these new products to help hundreds of thousands
of people buy a home over the next few years – first-time homebuyers, immigrant
families, and many others.
Our lender customers who use our mortgage products have recognized that we're
more focused on our affordable housing mission. They've said this to us,
they've said it publicly, and to the media. And this awareness has not
only fed our mission progress, but our business progress as well.
That brings me to the steps we've taken to build shareholder value. Let
me give you some numbers to gauge our progress. At year's end, the fair
value of net assets attributable to common stockholders was $26.8 billion –
a 17 percent increase from December 31, 2003. We believe fair value measures
provide a useful view of our business economics and risk. At the same time,
last year we increased our capital surplus and maintained a strong balance sheet.
Our strong capital position allowed us this March to raise our common stock
dividend by 17 percent.
Of course, risk management remains a core strength of Freddie Mac. Across a
range of rigorous measures – from standards of credit risk to interest-rate
risk to risk-based capital – the company remains safe and sound. Indeed, we
consistently pass tests of safety and soundness that very few financial institutions
could satisfy.
For example, we measure the sensitivity of our portfolio to sudden interest-rate
and yield curve movements every business day – sudden shocks of 50 and 25 basis
points respectively, and their impact on shareholder equity. We publicly report
this PMVS, as it's called, every month. And our published monthly duration
gap results show that we've kept our assets and liabilities well matched
through a wide variety of market conditions.
I'm also confident we can continue to produce long-term value for our
investors.
Any company's ultimate success depends on customer satisfaction. And
we have greatly improved our focus on the customer – listening and responding.
Let me tell you how we've changed.
In 2003, the company had lost customers, mortgage securities prices deteriorated,
and market share plunged. With Gene McQuade at the helm as chief operating officer,
we turned this around in 2004 and the first half of this year. Market share,
securities performance, customer satisfaction – all were up significantly.
In fact, last year, we introduced more mortgage products than in any other year
since the 1990s.
Here's another reason why our business has improved. Patti Cook –
our Executive Vice President for Investments – leads a consolidated division
whose approach links the sourcing or flow side of the business much more tightly
with the investment side.
Now, to help us boost efficiencies, we're streamlining the company. That's
why we have created a unified operations and technology division under Joe Smialowski.
It brings together all of our back office and IT operations that were previously
scattered throughout the company.
And to help us arrest the growth in our General and Administrative expenses,
we have cut some 1,300 consultants from the company's payroll. We hope
our G&A costs have peaked and we see further progress in the years ahead.
As for the over 5,200 employees working at Freddie Mac, they're doing
a great job. And we have them to thank for getting the company back on track
and for our success in the market.
We're trying to find new ways to remove barriers and streamline the organization
so our employees can better focus on the customer. Often, internal bureaucracy
prevents us from getting as much out of our employees' hard work as we
should.
Some of our recent spending has been a classic case of making investments today
to save money tomorrow. For example, the new systems we are building will allow
us to rely more on automated internal controls over financial reporting. And
by replacing many costly manual controls, we will reduce our audit costs. This
will pay off not just in better and more efficient accounting systems, but in
a better-run company.
Of course, our most important reform efforts go beyond Freddie Mac and encompass
the housing GSEs as a whole. Since coming to Freddie Mac, I have made it clear
we support sound legislation that will strengthen GSE regulation and market
confidence. But any legislation must be consistent with long-term shareholder
interest.
The genius of the GSE business model established by Congress is that it employs
private capital to achieve a vital public mission. In the political environment
of the past year, the full meaning of this point has often been obscured.
It is one I have made clearly and vigorously as part of the legislative process.
The truth is, Freddie Mac's investors – you – provide capital that is
indispensable to fulfilling our mission with minimum risk, and maximum benefit,
to the public. Some $35 billion of shareholder capital is on the hook should
we fail to manage our risks properly. And all told, the two GSEs have roughly
twice that much to protect against losses.
That's why my being a vigilant steward of your capital is not a diversion
from my public mission responsibilities. It advances those responsibilities.
Actually, there is less systemic risk with the GSEs, than without them. We
clearly have a comparative advantage in managing interest-rate risk.
In fact, the unique structure of the GSE system – transferring the risk
of interest rate fluctuations to investors in pass-through securities from borrower
and financial institutions – is what allows for the size and stability
of the American mortgage market. The GSEs have substantially contributed to
the success of the housing sector, which has been the major engine of growth
for the national economy over the past several years.
These are great accomplishments and a benefit to all.
So, I want to thank you again for investing in Freddie Mac.
Your confidence in us has helped millions of America's families achieve
homeownership. Our responsibility is to justify that confidence. And we are
fully committed to doing so.
And now, Fred, if you could please report the results of the vote. After which
I will take questions.
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