Plans to place Fannie and Freddie under US govt control may be announced today
Washington – US Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control, seeking to halt the crisis of confidence in the troubled companies that make up almost half of the US mortgage market.
The news, first reported on The Wall Street Journal’s website late on Friday, came after stock markets closed.
Officials say the announcement could be made as early as today, before Asian markets reopen tomorrow.
A bailout of the two mortgage giants may calm some Asian markets, where central banks and other financial institutions have been among the largest investors in Fannie Mae and Freddie Mac and, therefore, one of the largest sources of mortgage finance in the US.
The two government-sponsored enterprises own or guarantee almost half of the United States’ US$12 trillion (S$17 trillion) in outstanding home mortgage debt.
It is impossible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.
Instead of giving each company a big capital infusion up front, the government plans to make quarterly infusions as the companies’ losses warrant, sources said late on Friday. This would be an attempt to minimise the initial cost of the rescue.
The drastic effort follows the bailout this year of investment bank Bear Stearns as government officials continue to grapple with how to stem the credit and housing crises that have hobbled the economy.
For months, a fierce behind- the-scenes debate among policymakers has been waged over whether to seize the companies or let them work out their problems.
On Friday, senior Bush administration and Federal Reserve officials called in top executives of Fannie and Freddie and told them that the government was preparing to place the two companies under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies.
Placing the companies in conservatorship, rather than receivership, could signal that the government does not intend to nationalise or liquidate Fannie and Freddie.
Instead, under the terms of a federal law passed this summer, conservatorship is designed to allow the government to restructure the companies and return them to private control.
The executives of Fannie Mae and Freddie Mac were also told that, under the plan, they and their boards would be replaced.
Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be footed by taxpayers.
Shareholders have already lost billions of dollars as the stocks have plunged more than 80 per cent this year.
After stock markets closed on Friday, the shares of Fannie stood at US$5.50, down from US$70 a year ago. Freddie was trading at about US$4, down from about US$65.
If the government plan succeeds, uncertainty in the markets around Fannie and Freddie could subside, making it easier for the companies to get access to funding at cheaper rates.
That, in turn, could have a spillover effect on the overall market for mortgages, lowering interest rates and helping the battered US housing market to recover.
The Wall Street Journal reported on Friday that the rate of US home mortgages overdue or in foreclosure rose again in the second quarter as housing markets weakened and more borrowers defaulted on prime loans.
The foreclosure crisis, generally considered the worst since the Great Depression of the 1930s, began in late 2006 with a surge in defaults on sub-prime loans – loans made to people with weak credit records.
Professor Charles Calomiris, a professor of economics at Columbia University’s School of Business, said delaying a rescue would only increase the risks and costs.
‘The last thing you want to do is give a distressed borrower more time because when people are in distress, they tend to take a lot of risks,’ he said.
‘You don’t want zombie institutions floating around with time on their hands.’
Source: Straits Times – 07 Sept 2008
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