US govt likely to bail out Fannie, Freddie

Aug 19, 2008
US govt likely to bail out Fannie, Freddie

NEW YORK: It's growing more likely that the United States government
will have to use taxpayer money to rescue mortgage finance giants,
Fannie Mae and Freddie Mac as their biggest backers, foreign
governments, have begun to shun their debt.

Foreign demand for debt issued by Fannie and Freddie has faltered.
The companies rely heavily on overseas investment, often up to two-
thirds of each new multibillion-dollar note offering, to help pare
funding costs and keep mortgage rates low.

But foreign central banks have dumped nearly US$11 billion (S$15.6
billion) from their record holdings of this debt in four weeks, to
US$975 billion, and won't return in force before it's clear if - and
how - the government will back Fannie and Freddie, some analysts say.
The US has become dependent on foreign investors buying dollar-
denominated securities en masse, lowering borrowing costs for
consumer loans and stimulating the economy.

But with housing in its biggest slump since the Great Depression, and
banks burned by record foreclosures making it harder to get loans,
more extreme steps are needed to assure investors.

'It would take something dramatic for there to be a material
improvement in the confidence necessary to bring foreign investment
back to these agencies at the levels we've become used to,' said Mr
Michael Woolfolk, senior currency strategist at Bank of New York
Mellon.

Fannie and Freddie are considered 'too big to fail' as, together,
they own or guarantee one of every five outstanding mortgages in the
US.

Weekly financial newspaper Barron's reported yesterday that the US
Treasury was likely to mount a bailout in the months ahead.

Such a move could wipe out existing holders of the firms' common
stock, with preferred shareholders and even holders of the two
entities' US$19 billion of subordinated debt also suffering losses.

An insider in the Bush administration told Barron's that Fannie and
Freddie 'are being jawboned' by the Treasury Department and their new
regulator, the Federal Housing Finance Agency (FHFA), to raise more
capital. But government officials don't expect the agencies to
succeed, Barron's reported.

In July, the FHFA and Treasury agreed to backstop the companies if
needed, and President George W. Bush approved the measures as part of
a new housing act on July 31.

However, initial optimism about the plan has been doused by concern
about the government's follow-through. After accounting for deferred
tax assets and generous asset marks, Fannie and Freddie may each have
a negative US$50 billion in asset value, and little prospect of
rescuing themselves, Barron's reported.