News

U.S. may bail out lenders

The Bush administration on Friday ruled out a nationalization of troubled government-sponsored home lenders Fannie Mae and Freddie Mac, but it left the door open for a future bailout of these critical mortgage-market entities.

Fannie and Freddie help ensure that money for mortgages is widely available. They own or guarantee about half of the nation's $12 trillion mortgage market, and they pool mortgages into investment securities that are widely held by U.S. and foreign investors. This pooling has helped lower borrowing costs for millions of American homeowners.

The nationwide housing slump has resulted in the two lenders posting losses since last July of nearly $13 billion. James Lockhart, their chief federal regulator, said this week that they've raised more than $20 billion in new capital and have adequate cash in reserve.

Investors remain unconvinced.

Shares of both institutions are down more than 80 percent from last year, and in volatile trading Friday, Fannie lost another $2.53, or 19 percent, to close at $10.67, while Freddie was down 35 cents, or 4.4 percent, to $7.65.

Their plight roiled the broader market.

During trading Friday, the Dow Jones Industrial Average fell below 11,000 for the first time since July 2006 on worries about Fannie and Freddie. Stocks swung wildly all day before the Dow closed down 128.48 points to 11,100.54.

Adding to the pain was a $5 surge in the price of oil, which reached another record in overnight trading, touching $147 a barrel, on concern over recent tensions in the Middle East. Oil later pulled back and settled at $145.08, up $3.43.

Market fears were inflamed this week by news reports suggesting that the Bush administration was contemplating taking over one or both of them. Not so, Treasury Secretary Henry Paulson said in a statement Friday morning.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said.

Although chartered by Congress, Fannie and Freddie carry no explicit federal guarantee. Investors have long assumed that they are too big fail, but they want more visible assurances that failure won't be allowed.

An administration official with knowledge of meetings about Fannie and Freddie said Paulson sought, through nuance, to make clear that there were no plans for a government takeover, such as by putting one or both into receivership.

“We're not talking about nationalizing them, which is kind of the sense you get in the media,” said the official, who lacked authorization to speak on the matter and so insisted on anonymity.

But the administration may soon be forced into more aggressive steps that fall short of a takeover.

“They could do everything from making explicit an open-ended line of credit, buying subordinated debt … they could establish some kind of credit facility like has been established (by the Fed) … to trade securities for cash,” said Mark Zandi, chief economist for forecaster Moody's Economy.com in West Chester, Pa.

That's exactly what the Federal Reserve may be contemplating.

A Reuters report Friday said the Fed was opening its emergency lending facility – called the discount window – to Fannie and Freddie. This mechanism was designed for emergency lending to commercial banks. If the Reuters report is accurate, it would signal that Fannie and Freddie will be assured of as much cash as they need.

But Reuters hedged its report later in the day, and Fed officials neither confirmed nor denied the report to McClatchy.

Paulson briefed President Bush early Friday on the two home lenders' slumping fortunes. Later in the day, Bush, flanked by Paulson and Vice President Dick Cheney, told reporters that “he assured me that he and (Federal Reserve Chairman) Ben Bernanke will be working this issue very hard.”

At midafternoon Friday, Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, went in front of the cameras to talk up Fannie and Freddie.

“These institutions are in solid shape. … People need to realize that,” Dodd said. He also discounted talk that a housing bill he sponsored, and that passed the Senate on Friday, would further add to the institutions' problems.

The Bush administration on Friday ruled out a nationalization of troubled government-sponsored home lenders Fannie Mae and Freddie Mac, but it left the door open for a future bailout of these critical mortgage-market entities.

Fannie and Freddie help ensure that money for mortgages is widely available. They own or guarantee about half of the nation's $12 trillion mortgage market, and they pool mortgages into investment securities that are widely held by U.S. and foreign investors. This pooling has helped lower borrowing costs for millions of American homeowners.

The nationwide housing slump has resulted in the two lenders posting losses since last July of nearly $13 billion. James Lockhart, their chief federal regulator, said this week that they've raised more than $20 billion in new capital and have adequate cash in reserve.

Investors remain unconvinced.

Shares of both institutions are down more than 80 percent from last year, and in volatile trading Friday, Fannie lost another $2.53, or 19 percent, to close at $10.67, while Freddie was down 35 cents, or 4.4 percent, to $7.65.

Their plight roiled the broader market.

During trading Friday, the Dow Jones Industrial Average fell below 11,000 for the first time since July 2006 on worries about Fannie and Freddie. Stocks swung wildly all day before the Dow closed down 128.48 points to 11,100.54.

Adding to the pain was a $5 surge in the price of oil, which reached another record in overnight trading, touching $147 a barrel, on concern over recent tensions in the Middle East. Oil later pulled back and settled at $145.08, up $3.43.

Market fears were inflamed this week by news reports suggesting that the Bush administration was contemplating taking over one or both of them. Not so, Treasury Secretary Henry Paulson said in a statement Friday morning.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said.

Although chartered by Congress, Fannie and Freddie carry no explicit federal guarantee. Investors have long assumed that they are too big fail, but they want more visible assurances that failure won't be allowed.

An administration official with knowledge of meetings about Fannie and Freddie said Paulson sought, through nuance, to make clear that there were no plans for a government takeover, such as by putting one or both into receivership.

“We're not talking about nationalizing them, which is kind of the sense you get in the media,” said the official, who lacked authorization to speak on the matter and so insisted on anonymity.

But the administration may soon be forced into more aggressive steps that fall short of a takeover.

“They could do everything from making explicit an open-ended line of credit, buying subordinated debt … they could establish some kind of credit facility like has been established (by the Fed) … to trade securities for cash,” said Mark Zandi, chief economist for forecaster Moody's Economy.com in West Chester, Pa.

That's exactly what the Federal Reserve may be contemplating.

A Reuters report Friday said the Fed was opening its emergency lending facility – called the discount window – to Fannie and Freddie. This mechanism was designed for emergency lending to commercial banks. If the Reuters report is accurate, it would signal that Fannie and Freddie will be assured of as much cash as they need.

But Reuters hedged its report later in the day, and Fed officials neither confirmed nor denied the report to McClatchy.

Paulson briefed President Bush early Friday on the two home lenders' slumping fortunes. Later in the day, Bush, flanked by Paulson and Vice President Dick Cheney, told reporters that “he assured me that he and (Federal Reserve Chairman) Ben Bernanke will be working this issue very hard.”

At midafternoon Friday, Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, went in front of the cameras to talk up Fannie and Freddie.

“These institutions are in solid shape. … People need to realize that,” Dodd said. He also discounted talk that a housing bill he sponsored, and that passed the Senate on Friday, would further add to the institutions' problems.

  Comments