Fannie, Freddie could need up to $20 bil in capital; FDIC could lose up to $8 billion on IndyMac failure
by Martin Crutsinger and Alan Zibel - Jul. 15, 2008 12:00 AM
Associated Press
Now that the federal government has thrown a lifeline to mortgage giants Fannie Mae and Freddie Mac, taxpayers could be on the hook for billions more if the crisis of confidence spreads.
On Monday, there were encouraging signs for the rescue plan, but also signs of concern that the plan won't be enough, notably on Wall Street, where shares of the two companies slumped further.
Other banks are already teetering: National City Corp. shares fell nearly 15 percent on rumors of financial trouble, even though it said it was experiencing no unusual depositor or creditor activity, and Washington Mutual Inc.'s shares fell 35 percent amid worries about whether it had enough cash to handle the mortgage market downturn. WaMu said that it did.
Worried customers lined up Monday to pull cash out of their accounts at IndyMac Bank, seized on Friday by the federal government.
Critics said they fear the Fannie-Freddie rescue will make more bailouts inevitable by sending a message that some institutions are too big to fail, thus encouraging risky behavior.
"It sends the wrong message to the world," said Joshua Rosner, managing director of the research firm Graham, Fisher & Co. in New York.
As long as more homeowners default on mortgages, losses to financial institutions will mount.
The losses already exceed $400 billion, and some analysts believe they will top $1 trillion before the housing carnage is over. By comparison, Congress has authorized $650 billion so far to fight the Iraq war.
The Bush administration and the Federal Reserve announced an emergency-rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages, almost half of the nation's total.
The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate.
The Fed announced it would allow Fannie and Freddie to get loans directly from the Fed, a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.
House Financial Services Chairman Barney Frank, D-Mass., predicted Congress would grant approval for the extended line of credit as part of a broader housing measure that President Bush could sign by the end of next week.
Monday began well for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions and raised $3 billion in short-term securities.
Fannie and Freddie stock rose early in the day but gave up the gains. Fannie closed down about 5 percent, at $9.73; Freddie closed down about 8 percent, at $7.11.
Meanwhile, hundreds of worried customers lined up Monday to pull their money out of IndyMac bank, seized by the government Friday in the second biggest bank failure in U.S. history.
The Federal Deposit Insurance Corp. estimated that the largest failure since the collapse of Continental Illinois in 1984 would cost between $4 billion and $8 billion out of the agency's $53 billion fund.
Brian Bethune, chief U.S. financial economist at Global Insight, called the troubles at Fannie and Freddie a "potentially dangerous turn of events" for the U.S. economy.
He said they needed to be addressed quickly with an infusion from the government - read "taxpayers" - of as much as $20 billion in new capital for both institutions.
Right now, the Treasury can extend up to $2.25 billion in loans each to Fannie and Freddie. Officials refused to discuss what the new limit might be but dismissed one report of a $300billion limit as too high.
Treasury officials also said buying Fannie and Freddie stock would be a last resort.
Analysts say the economic risks of doing nothing are just too great.
"If the government hadn't moved, and Fannie and Freddie failed, the cost to taxpayers and the overall economy would be enormous," said Mark Zandi, chief economist at Moody's Economy.com.
If the lenders were unable to play their huge roles in financing new mortgages, the housing market would only suffer more, he said - not to mention the turmoil for the financial institutions around the world that invest in Fannie and Freddie's debt securities.
Critics have warned for years that Fannie and Freddie had grown too large without a large enough financial cushion.
"They have been allowed to grow out of control to the point where they must be backed by the U.S. government," said Peter Wallison, a senior fellow at the American Enterprise Institute. "We have just ... allowed ourselves to become hostage to these two institutions."
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