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US crisis over $5 trillion loans liability
White House scrambles for options to rescue mortgage companies Fannie Mae and Freddie Mac
James Doran in New York The Observer,
Sunday July 13, 2008
President Bush and US Treasury Secretary Hank Paulson were locked in high-level talks with regulators this weekend to decide the fate of more than $5 trillion-worth of American home loans and the future of the country's two biggest mortgage guarantee companies.
Shares in Fannie Mae and Freddie Mac, which between them own or guarantee some $5.2 trillion-worth (£2.6 trillion) of US mortgages, fell sharply on Friday as the companies teetered on the brink of collapse.
Speculation mounted last week that a government bailout was on the cards as the housing market crisis continues to worsen. Both Fannie Mae and Freddie Mac operate under US government charter to buy mortgages and repackage them into securities, as a means of providing liquidity and stability to the housing market. But as the value of US homes and the market for mortgage-backed securities continue to freefall, both are struggling to maintain adequate capitalisation.
The biggest problem is the huge increase in foreclosures that has followed the sub-prime mortgage crisis. Fannie and Freddie guarantee some 40 per cent of all mortgages in the US, but the value of the homes used to underwrite those mortgages has in many cases fallen well below the value of the loans.
Fears that either Fannie, Freddie or both could collapse prompted Bush to call an emergency meeting with Paulson and other officials last week.
One plan under discussion was to put the two companies into so-called 'conservatorship' - a halfway house between privatisation and nationalisation. Such a plan would render their shares worthless and effectively heap responsibility for their loan books onto the federal government. This could prove disastrous for US Treasury bonds, the market for which is only $4.6 trillion.
Sources close to the US Treasury suggested, however, that it was more likely the Federal Reserve would intervene to help the two companies shore up their finances. The Fed could extend them 10-year loans on favourable terms. Alternatively, it could buy shares in each company in the event of a cash call. 'Both of these routes would seem less drastic and more favourable than any direct government control,' the source said.
Paulson seemed to echo that view in a statement on Friday: 'Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.'
Wall Street is also braced for a fresh round of bad news from troubled investment bank Merrill Lynch. Chief executive John Thain is expected to announce as much as $5bn more in write-downs related to the credit crunch. He is also expected to answer calls to sell off stakes in Bloomberg, the financial information company, and Blackstone Group, the asset manager.
White House scrambles for options to rescue mortgage companies Fannie Mae and Freddie Mac
James Doran in New York The Observer,
Sunday July 13, 2008
President Bush and US Treasury Secretary Hank Paulson were locked in high-level talks with regulators this weekend to decide the fate of more than $5 trillion-worth of American home loans and the future of the country's two biggest mortgage guarantee companies.
Shares in Fannie Mae and Freddie Mac, which between them own or guarantee some $5.2 trillion-worth (£2.6 trillion) of US mortgages, fell sharply on Friday as the companies teetered on the brink of collapse.
Speculation mounted last week that a government bailout was on the cards as the housing market crisis continues to worsen. Both Fannie Mae and Freddie Mac operate under US government charter to buy mortgages and repackage them into securities, as a means of providing liquidity and stability to the housing market. But as the value of US homes and the market for mortgage-backed securities continue to freefall, both are struggling to maintain adequate capitalisation.
The biggest problem is the huge increase in foreclosures that has followed the sub-prime mortgage crisis. Fannie and Freddie guarantee some 40 per cent of all mortgages in the US, but the value of the homes used to underwrite those mortgages has in many cases fallen well below the value of the loans.
Fears that either Fannie, Freddie or both could collapse prompted Bush to call an emergency meeting with Paulson and other officials last week.
One plan under discussion was to put the two companies into so-called 'conservatorship' - a halfway house between privatisation and nationalisation. Such a plan would render their shares worthless and effectively heap responsibility for their loan books onto the federal government. This could prove disastrous for US Treasury bonds, the market for which is only $4.6 trillion.
Sources close to the US Treasury suggested, however, that it was more likely the Federal Reserve would intervene to help the two companies shore up their finances. The Fed could extend them 10-year loans on favourable terms. Alternatively, it could buy shares in each company in the event of a cash call. 'Both of these routes would seem less drastic and more favourable than any direct government control,' the source said.
Paulson seemed to echo that view in a statement on Friday: 'Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.'
Wall Street is also braced for a fresh round of bad news from troubled investment bank Merrill Lynch. Chief executive John Thain is expected to announce as much as $5bn more in write-downs related to the credit crunch. He is also expected to answer calls to sell off stakes in Bloomberg, the financial information company, and Blackstone Group, the asset manager.
