Uncertainty hangs over the fate of Fannie and Freddie
Güncelleme Tarihi:
Anxiously awaiting a move by the Treasury Department and spurned by large investment firms, Freddie Mac and Fannie Mae find themselves unable to raise capital and with little ability to maneuver, as analysts warned that the risks may hit other banks as well.
Treasury officials have reviewed multiple plans for intervention, the New York Times reported on Saturday.
But they have not identified a set of triggers that will compel a government bailout. Nor have they indicated to Freddie Mac or Fannie Mae executives when a bailout may occur or what form it may take, the report added.
Shares of Fannie Mae and Freddie Mac fell further this week after news reports suggested the federal government was poised to nationalize the two companies, which together underwrite or guarantee nearly half of the $12 trillion
Fannie Mae and Freddie Mac's $36 billion in preferred stock was downgraded to the lowest investment-grade rating by Moody's Investors Service, which said the increased likelihood of "direct support" from the U.S. Treasury may devalue the securities, dealing another blow to the ailing mortgage companies.
“As long as there is uncertainty over Treasury’s plan, we can’t raise money, and as long as we can’t raise money, there’s going to be more and more speculation about Treasury’s plan,” an executive with one of the mortgage firms, who was not authorized to speak to the media, told NYT.
In recent days, Freddie Mac has met with potential investors at the law offices of Davis, Polk & Wardwell.
But the company has been told by several private equity giants — the Texas Pacific Group, Kohlberg Kravis Roberts & Company, the Carlyle Group and the Blackstone Group — that those investors are unwilling to purchase any type of new stock in the company until it is clear what steps the Treasury Department may take to assist the ailing firm.
A seperate report said the Treasury still believes that housing finance giants Fannie Mae and Freddie Mac should remain shareholder-owned, according to a source familiar with Treasury thinking.
Treasury Secretary Henry Paulson last month outlined a series of backstop measures that could be used to support Fannie Mae and Freddie Mac, including a fresh injection of capital from the government.
Speculation has mounted in financial markets that Treasury eventually would be forced to add capital, causing investors to question how such a move could affect the corporate structures.
When Paulson announced the lifeline for Fannie Mae and Freddie Mac in July, he and President George W. Bush both said that government policy aimed to maintain the government-sponsored enterprises as private enterprises.
The U.S. Congress backed the proposal in July and on Friday, the White House said that Paulson has unencumbered power to deal with the current crisis as he sees fit.
RISKS MAY HIT BANKS
Common shareholders of Fannie Mae and Freddie Mac may not be the only ones who suffer if the
Banks that hold their so-called junior debt may also take major earnings hits under a bailout, analysts told Dow Jones.
Only a handful of banks have voluntarily disclosed how much of their exposure to the two troubled government-sponsored enterprises, or GSEs, is in preferred stock or subordinated debt.
Those securities face a higher risk of being wiped out under a bailout than senior debt or mortgage-backed securities.
Analysts at research firm CreditSights estimated there was about $50 billion in vulnerable GSE junior securities outstanding, with banks likely holding a large portion of that amount.
Most bank holdings of Fannie and Freddie securities are in senior debt or mortgage-backed securities, which most analysts say are virtually certain to be protected under any bailout scenario.
But support for the junior securities is less certain, and they could emerge as yet another burden to an industry already saddled with problems.
For example, if Sovereign Bancorp Inc. (SOV), a Philadelphia-based commercial bank, had to write down its entire portfolio of GSE junior securities, the hit would amount to about four quarters of the bank's earnings, the CreditSights analysts said.