Business | Markets
Fannie and Freddie takeover a pre-emptive strike by Treasury
The US Treasury has been worrying and wrangling over Fannie Mae's and Freddie Mac's capital levels and systemic risks for years. So why move now to seize control of the two troubled mortgage finance giants
- Reuters
- Published: 23:49 September 8, 2008
Washington: The US Treasury has been worrying and wrangling over Fannie Mae's and Freddie Mac's capital levels and systemic risks for years. So why move now to seize control of the two troubled mortgage finance giants?
Mounting credit losses, waning foreign appetite for the institutions' mortgage-backed securities and a sobering review by Morgan Stanley prompted Treasury Secretary Henry Paulson to launch what may become the most costly bailout in US history.
"Rather than waiting until a triggering event - but seeing one on the horizon - they decided to strike pre-emptively," said Bert Ely, a longtime banking industry consultant in Alexandria, Virginia.
"They lined up the evidence to present this to the Fannie and Freddie boards before their hand was forced like it was with Bear Stearns," he added.
At the crux of the matter is housing and the economy. With mortgage default rates rising, markets have been losing confidence in the viability of Fannie Mae and Freddie Mac, government-sponsored enterprises that buy mortgages from lenders and hold them or securitise and sell them on to investors.
As demand for their paper diminishes, the cost of mortgages rises, putting more pressure on the already battered housing market. "He [Paulson] has got to fix housing. Fixing the GSEs is critical to fixing housing. He has to do it before he leaves office," said Michael Youngblood, principal of Five Bridges Capital LLC in Bethesda, Maryland.
Foreign investors, in particular, have been shunning Fannie and Freddie securities, long viewed as nearly as safe as Treasury debt due to an implied government backing. They cut their holdings of US agency securities by $9.75 billion in the week ended September 3, marking the seventh weekly drop in a row, according to Federal Reserve data.
The Bank of China recently said it cut its holdings of Fannie and Freddie securities to $12.67 billion as of August 25 from the end of June, and Russia has reduced its holdings of Fannie, Freddie and Federal Home Loan Bank securities by around $40 billion this year by not replacing maturing paper. A central bank official said last week further reductions were being made.
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