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Fannie, Freddie Tumble After Poole's Comments On Solvency, Ubs Price Cut

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Guest The_Oldie


July 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans, tumbled to the lowest in 17 years in New York trading after a former Federal Reserve president said the companies may need a government bailout.

Fannie Mae tumbled as much as 20 percent and Freddie Mac slumped as much as 29 percent in New York Stock Exchange composite trading after UBS AG analysts said the company creates ``challenges'' for the company's plans to raise $5.5 billion, UBS analysts said in a report today.

Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don't have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.

Fair value accounting measures a company's net worth if it had to liquidate all of its assets to repay liabilities. Fannie Mae and Freddie Mac, both of whom have the implicit backing of the government, make money by borrowing in the bond market and reinvesting the proceeds in higher-yielding mortgages and securities backed by home loans.

`Inflection' Point

Fannie Mae slumped $2.70 to $12.61 at 10:19 a.m., extending declines for the year to 69 percent. Freddie Mac tumbled $2.96 to $7.30, taking its 2008 slide to 78 percent. UBS AG analysts led by Eric Wasserstrom in New York increased their estimates for losses at Freddie Mac and cut their price target for the stock to $10 from $28 after meeting with Freddie Mac's chief financial officer Anthony Piszel and controller David Kellerman, according to a report today.

Fannie Mae and Freddie Mac have raised a combined $20 billion since December to cover losses of more than $11 billion generated since the credit crisis began last year. Freddie Mac has yet to raise a planned $5.5 billion, scheduled for mid-year.

Paulson, Bernanke

U.S. Treasury Secretary Henry Paulson told lawmakers in Washington today that he's been assured by the regulator for Fannie Mae and Freddie Mac that the companies have enough capital.

The Office of Federal Housing Enterprise Oversight ``has made clear that they are adequately capitalized,'' Paulson said in prepared testimony for the House Financial Services Committee. Federal Reserve Chairman Ben S. Bernanke is also slated to appear.

The Treasury has been discussing what to do if Fannie Mae and Freddie Mac fail for months as part of its contingency planning, the Wall Street Journal reported today, citing three people familiar with the matter. The government doesn't expect the companies to fail and it doesn't have a rescue plan in place, the Journal said.

``At some point we're going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,'' Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television yesterday. ``We're getting to that point where a decision has to be made by Washington.''


The government is counting on Fannie Mae and Freddie Mac, which own or guarantee about half the $12 trillion in home loans outstanding, to help revive the housing market. Congress lifted growth restrictions on the companies, eased their capital requirements and allowed them to buy bigger ``jumbo mortgages'' to spur demand for home loans as competitors fled the market.

``We are managing our business and maintaining a capital position that will allow us to fulfill our congressionally chartered mission now and in the future,'' Brian Faith, a spokesman for Fannie Mae, said.

Poole is ``a long-time critic,'' said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac.

``Freddie Mac is doing exactly what Congress intended when it chartered the company and, more recently, when it passed the Economic Stimulus Act,'' McHale said. ``We are well capitalized and positioned to continue to serve our vital housing mission.''

Government Ties

While leading the St. Louis Fed, Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and said the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters.

Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.

The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said.

``We know in a crisis the Federal Reserve tap would be open,'' said Poole, now a senior fellow at the Cato Institute.

The bailout of Bear Stearns Cos. by JPMorgan Chase & Co., arranged by the Fed, demonstrates the government's unwillingness to allow ``large, systemically important'' financial institutions to fail, he said. Bear Stearns collapsed after customers fled amid speculation the company faced a cash shortage.

``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''

$20 Billion Raised

The companies have access to the Fed's so-called Fedwire payments system allowing them to access funding if needed, said Vincent Reinhart, the Fed's chief monetary-policy strategist from 2001 until September 2007.

They can withstand the slump in part because most of their investments are mortgages made before 2006 when lending standards were tighter, making them less likely to default, said Eileen Fahey, a Chicago-based analyst at Fitch Ratings.

``We do not believe they are technically insolvent,'' Fahey said. ``People seem to lose sight of the fact that a majority of the mortgages that they are holding and are guaranteeing were originated pre-2006.''

Comments by the companies' regulator this week that they are adequately capitalized also eased concern, said Lawrence Yun, chief economist of the National Association of Realtors in Washington. The companies have about $80 billion of regulatory capital supporting $5.2 trillion of mortgages.

``Just given the size of the two companies, surely the government would not stand aside'' and let them fail, Yun said.

Record Spreads

Fannie Mae sold $3 billion of two-year notes yesterday to yield 74 basis points more than Treasuries. A basis point is 0.01 percentage point. That's the widest spread since Fannie Mae first sold two-year notes in 2000 and triple what it paid in June 2006.

Fannie Mae's spreads relative to two-year interest-rate swap spreads, considered a gauge of investors' perception of credit risk, remain about 12 basis points below a four-year high that was reached in March, Bloomberg data show.

Fannie Mae debt was trading 13 basis points tighter than two-year swap spreads today compared with 2 basis points tighter on March 19, Bloomberg data show. Freddie Mac spreads are about 19 basis points tighter than swap spreads after trading at the same level as swaps on March 17. Swap spreads are the difference between interest-swap rates above Treasury yields.

Credit-Default Swaps

The price of credit-default swaps, contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac, doubled in the past two months to more than 80 basis points for the senior debt, according to London-based CMA Datavision.

The median credit-default swap on debt rated Aaa by Moody's was 36 basis points as of yesterday, data from the rating firm's strategy group show. It was 87 basis points for debt rated A3.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

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Guest DissipatedYouthIsValuable

The market enthusiasm for Fannie has really slackened off

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It's seems the USA is ahead of the game when it's comes to the UK crashing and soon that toxic debt will be travling both ways across the atlantic.

Fannie is about to get stuffed by Fred if you ask me :lol:

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This is a huge issue, which has been rumbling in the back ground for months. 50% of the US mortgage market is backed by these guys. I have no idea what will happen when they go to zero.

End of US banking system?

State collapse.

End of US empire?


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  • 396 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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