Banking

Fannie, Freddie rescue met with mixed emotions

Now that the federal government has thrown a lifeline to mortgage giants Fannie Mae and Freddie Mac, taxpayers could be on the hook for billions more if the crisis of confidence spreads.

There were encouraging signs Monday for the rescue plan, but also signs of concern – notably on Wall Street, where shares of the two companies slumped further – that the plan won't be enough.

Some critics said they fear the Fannie-Freddie rescue effort will make more bailouts inevitable by sending a message that some institutions are too big to fail and thus encouraging risky behavior.

“It sends the wrong message to the world,” said Joshua Rosner, managing director of research firm Graham, Fisher & Co. in New York.

The Treasury's effort is an “unmitigated disaster,” according to famed investor Jim Rogers. Taxpayers will be saddled with debt if Congress approves the plan, he told Bloomberg.

“I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers said. “So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.”

Sung Won Sohn, an economics professor at The Smith School of Business at Cal State Channel Islands, cited soaring oil costs, a weakening economy and an unstable housing market that he said will only get worse.

“I don't think these steps are enough to arrest the deterioration,” he said.

As long as more homeowners default on mortgages, losses to financial institutions will mount. Those losses already exceed $400 billion, and some analysts believe they will top $1trillion before the housing carnage is over.

By comparison, Congress has authorized $650 billion so far to fight the Iraq war.

The Bush administration and the Federal Reserve announced an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5trillion in mortgages – almost half of the nation's total.

The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate.

The Fed also announced it would allow Fannie and Freddie to get loans directly from the Fed – a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.

Monday began with a good sign for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions which raised $3 billion in short-term securities.

Fannie and Freddie stock rose early in the day but gave up the gains. Fannie closed down about 5 percent, at $9.73, and Freddie closed down about 8 percent, at $7.11. Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies' shares may fall another 35 percent.

Analysts do not expect the volume of bank failures that happened from 1990 to 1992, when 834 folded. But the FDIC does plan to review whether to raise the fees it charges banks to beef up its insurance fund.

Brian Bethune, chief U.S. financial economist at Global Insight, called the troubles at Fannie and Freddie a “potentially dangerous turn of events” for the U.S. economy.

He said they needed to be addressed quickly with an infusion from the government – read “taxpayers” – of as much as $20 billion in new capital for both institutions.

Right now, the Treasury can extend up to $2.25 billion in loans each to Fannie and Freddie. Officials refused to discuss what the new limit might be but dismissed one report of a $300 billion limit as too high.

Treasury officials also said directly buying Fannie and Freddie stock would be a last resort.

Substantial sums are involved in any event. Analysts say the risks of doing nothing are just too great.

“If the government hadn't moved and Fannie and Freddie failed, the cost to taxpayers and the overall economy would be enormous,” said Mark Zandi, chief economist at Moody's Economy.com.

If Fannie and Freddie were unable to play their huge roles in financing new mortgages, the housing market would only suffer more, he said – not to mention the turmoil for the financial institutions around the world that invest in Fannie and Freddie's debt securities.

The next few weeks — in which Fannie and Freddie post their second-quarter results and may attempt to raise a bigger capital cushion — are key, Zandi said. He said in the best possible outcome is if the rescue plan helps the two companies stabilize their finances on their own without any loss of government loans.

“At the end of the day, with a little bit of luck, it won't cost taxpayers a dime,” Zandi said. Bloomberg News contributed.

Now that the federal government has thrown a lifeline to mortgage giants Fannie Mae and Freddie Mac, taxpayers could be on the hook for billions more if the crisis of confidence spreads.

There were encouraging signs Monday for the rescue plan, but also signs of concern – notably on Wall Street, where shares of the two companies slumped further – that the plan won't be enough.

Some critics said they fear the Fannie-Freddie rescue effort will make more bailouts inevitable by sending a message that some institutions are too big to fail and thus encouraging risky behavior.

“It sends the wrong message to the world,” said Joshua Rosner, managing director of research firm Graham, Fisher & Co. in New York.

The Treasury's effort is an “unmitigated disaster,” according to famed investor Jim Rogers. Taxpayers will be saddled with debt if Congress approves the plan, he told Bloomberg.

“I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers said. “So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.”

Sung Won Sohn, an economics professor at The Smith School of Business at Cal State Channel Islands, cited soaring oil costs, a weakening economy and an unstable housing market that he said will only get worse.

“I don't think these steps are enough to arrest the deterioration,” he said.

As long as more homeowners default on mortgages, losses to financial institutions will mount. Those losses already exceed $400 billion, and some analysts believe they will top $1trillion before the housing carnage is over.

By comparison, Congress has authorized $650 billion so far to fight the Iraq war.

The Bush administration and the Federal Reserve announced an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5trillion in mortgages – almost half of the nation's total.

The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate.

The Fed also announced it would allow Fannie and Freddie to get loans directly from the Fed – a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.

Monday began with a good sign for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions which raised $3 billion in short-term securities.

Fannie and Freddie stock rose early in the day but gave up the gains. Fannie closed down about 5 percent, at $9.73, and Freddie closed down about 8 percent, at $7.11. Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies' shares may fall another 35 percent.

Analysts do not expect the volume of bank failures that happened from 1990 to 1992, when 834 folded. But the FDIC does plan to review whether to raise the fees it charges banks to beef up its insurance fund.

Brian Bethune, chief U.S. financial economist at Global Insight, called the troubles at Fannie and Freddie a “potentially dangerous turn of events” for the U.S. economy.

He said they needed to be addressed quickly with an infusion from the government – read “taxpayers” – of as much as $20 billion in new capital for both institutions.

Right now, the Treasury can extend up to $2.25 billion in loans each to Fannie and Freddie. Officials refused to discuss what the new limit might be but dismissed one report of a $300 billion limit as too high.

Treasury officials also said directly buying Fannie and Freddie stock would be a last resort.

Substantial sums are involved in any event. Analysts say the risks of doing nothing are just too great.

“If the government hadn't moved and Fannie and Freddie failed, the cost to taxpayers and the overall economy would be enormous,” said Mark Zandi, chief economist at Moody's Economy.com.

If Fannie and Freddie were unable to play their huge roles in financing new mortgages, the housing market would only suffer more, he said – not to mention the turmoil for the financial institutions around the world that invest in Fannie and Freddie's debt securities.

The next few weeks — in which Fannie and Freddie post their second-quarter results and may attempt to raise a bigger capital cushion — are key, Zandi said. He said in the best possible outcome is if the rescue plan helps the two companies stabilize their finances on their own without any loss of government loans.

“At the end of the day, with a little bit of luck, it won't cost taxpayers a dime,” Zandi said. Bloomberg News contributed.

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