Late yesterday Freddie Mac surprised markets by reporting a profit and by not requesting additional bailout money from Treasury. Before we celebrate, however, let’s consider a few revealing footnotes from the company’s quarterly filing. But first, some key financial ratios.

As you can see, non-performing assets are still rising quickly. (Click table to enlarge in new window)

As for the filing footnotes, we see that Freddie’s profit line got a big assist from FASB’s new fair value accounting rules:

Q2:

… the company recognized $10.5 billion in total other-than-temporary impairments of AFS securities. Included in this amount were $2.2 billion of credit-related impairments recognized in earnings …. Also included in total other-than-temporary impairments were $8.3 billion of non-credit related impairments that were recognized in accumulated other comprehensive income (loss) (AOCI).

Q1:

During the first quarter of 2009, prior to its … adoption of the new accounting standard, the company recorded $7.1 billion of security impairments on its AFS securities in earnings, reflecting both credit-related and non-credit-related impairments.

Overall, accounting changes increased equity $5.1 billion according to Freddie.. Higher equity equals higher net worth. As long as the company maintains positive net worth, Treasury doesn’t have to provide more bailout funds. Freddie’s total bailout to date, by the way, is $51.7 billion.

What FASB giveth, it can also taketh. Revisions to other accounting rules will require Fred to bring off balance sheet assets back onto the balance sheet:

Upon the adoption of SFAS 166 and SFAS 167 [on 1/1/10], we will be required to consolidate [off balance sheet assets] in our financial statements, which could have a significant impact on our net worth. Such consolidation could also significantly increase our required level of capital under existing capital rules …

I doubt the significant impact is going to be positive. And remember, whenever Freddie’s net worth goes negative, that triggers another bailout payment from Treasury.

As for any talk that Fan and Fred will be wound down over time, that’s certainly not in the near future. You can see in the table above that the company’s portfolio of mortgages is not shrinking.*

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*Including non-Freddie securities, the total mortgage portfolio would have shrunk 0.3% Q2 vs. Q1.