US Treasury jumps in to calm markets - WASHINGTON
Paulson plays down talk of plans to take over two cornerstones of the US housing market
(WASHINGTON) Treasury Secretary Henry Paulson, seeking to calm nervous investors about the financial state of Fannie Mae and Freddie Mac, said yesterday that the government’s primary policy focus currently is to leave the congressionally created mortgage giants intact.
Mr Paulson: Maintaining dialogue with regulators and the companies
‘Today, our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,’ Mr Paulson said.
The financial health of the two companies is of critical concern to Washington policymakers because of the crucial role they play in the housing market.
The pair hold or guarantee around US$5 trillion worth of mortgages, roughly half of the US$9.5 trillion debt of the United States.
The fear is that a failure of one or both would wreak havoc on the nation’s financial system and the broader economy as well.
Mr Paulson’s comments came amid reports that the government was considering a plan to take over one or both companies and place them in a conservatorship.
Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is ‘critically undercapitalised’. A conservator would have sweeping powers to overhaul them, but would not have the authority to close them.
A government rescue of Fannie and Freddie would mark the second time that Washington has had to step in to support the financial system since mounting defaults in the US sub-prime mortgage industry grew into a global credit crisis in August 2007.
In March, the Federal Reserve backed a plan for JPMorgan Chase & Co to buy beleaguered investment bank Bear Stearns.
Shares of the companies’ stocks have plunged in recent days, with Freddie’s down sharply on Friday as fear intensified. Investors are increasingly worried that the companies would suffer more losses as housing prices keep falling and foreclosures keep rising.
They are also worried that the companies would have to raise a lot more money to cover those losses. By law, the companies are required to hold only a fraction of what is mandated for commercial banks as a financial cushion against risk.
The Treasury chief said that his department was ‘maintaining a dialogue with regulators and with the companies’. The companies’ main regulator will continue to work with the Fannie Mae and Freddie Mac ‘as they take the steps necessary to allow them to continue to perform their important mission’, said Mr Paulson.
Congress created the companies to provide a steady stream of money for home mortgages. Although the government doesn’t guarantee Fannie’s and Freddie’s debts, most investors believe that the government would come to their rescue if the companies fell into dire straits.
This ‘implicit’ guarantee allows them to borrow money at lower interest rates than other financial companies.
Citigroup Inc, however, is keeping its ‘buy’ rating on the two largest buyers of US home loans. It says that the sell-off in the shares of the two companies isn’t based on fundamentals.
Before noon, shares of the two companies were the worst percentage decliners and most actively traded by volume on the New York Stock Exchange, with Freddie down 37 per cent at US$5.03 and Fannie down 33 per cent to US$8.74.
On Wall Street, the Dow Jones industrial average slid 205.66 points, or 1.83 per cent, to 11,023.36. The Standard & Poor’s 500 Index slumped 22.36 points, or 1.78 per cent, to 1,231.03. The Nasdaq Composite Index tumbled 35.80 points, or 1.59 per cent, to 2,222.05.
Citigroup analyst Bradley Ball said that he doesn’t expect ‘nationalisation’ of Fannie and Freddie. Freddie is also committed to raising US$5.5 billion in capital, he wrote in a note to clients.
Mr Ball said that Freddie management said at a meeting yesterday that there was no ’significant change’ in its financial condition during the second quarter. — AP, Bloomberg, Reuters
Source : Business Times - 12 July 2008
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