US TREASURY secretary Henry Paulson signalled that a government takeover of Fannie Mae and Freddie Mac won't be necessary, saying they should continue as shareholder-owned companies with federal charters.
"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 in a statement in Washington. President George W Bush told reporters separately the two firms were "very important institutions" and that he discussed market "concerns" with Mr Paulson earlier today.
Mr Paulson's remarks indicate he wants to reassure shareholders they won't be wiped out by any government efforts to ensure the stability of the firms, which own or guarantee almost half the $12 trillion in US mortgages.
The companies' shares initially fell after the statement, before paring their losses. Fannie Mae fell $3.10, or 23 per cent, to $10.10 at 1:39pm yesterday in New York Stock Exchange trading, after hitting a low of $6.68 earlier in the day. Freddie Mac was down $1.52, or 19 per cent, at $6.48 after reaching a low of $3.89. Bonds and credit-default swaps on the companies rallied.
The treasury chief released the remarks after the companies' shares slid to their lowest levels in more than 17 years. Fannie Mae and Freddie Mac have fallen more than 75 per cent this year on concerns they don't have enough capital to offset losses from the mortgage meltdown.
Citigroup kept a "buy" rating on the two stocks yesterday, saying the sell-off wasn't based on fundamentals. New York-based Citigroup analyst Bradley Ball said in a note to clients he didn't expect "nationalisation" of the companies. The declines spurred officials to consider options, including having regulators take over one or both companies, said Joshua Rosner, an analyst with Graham Fisher, who met officials in Washington yesterday.
"Although there is some danger here that Fannie and Freddie may become insolvent, I think it's very, very remote unless for some reason the credit markets lose confidence in the willingness of the US government to stand behind them," said Peter Wallison, a former general counsel at the US treasury. "It's impossible to imagine such a thing happening."
Credit-default swaps linked to the debt of Fannie Mae dropped 21 basis points to 56 basis points, according to broker Phoenix Partners Group in New York. Contracts on Freddie Mac declined about 19 basis points to 58 basis points. Before today, both contracts had more than doubled in the past two months.
"Nationalisation should not be an option," former treasury secretary John Snow said in a telephone interview. "They shouldn't be allowed to have their paper trade as if it's government paper."
Officials said this week that the two government-sponsored enterprises had "adequate" capital, while Federal Reserve chairman Ben Bernanke told lawmakers yesterday that they should, like all financial firms, raise more funds.
Both companies are adequately capitalised, holding capital well in excess of the requirements, James Lockhart, the director of the Office of Federal Housing Enterprise Oversight (Ofheo), said in a statement yesterday. "They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets."
Fannie Mae and Freddie Mac would have to post pretax losses and writedowns of about $77 billion before the US would be compelled to start a rescue, according to estimates by analysts. The companies have already raised $20 billion to cover losses amid the highest delinquency rates in at least 29 years.
"Ofheo will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission," Paulson said yesterday. "We are maintaining a dialogue with regulators and with the companies." - (Bloomberg)
