Gov’t not expected to help more companies U.S. Treasury, Fed pledge Fannie Mae, Freddie Mac help BY JOE BEL BRUNO AND STEPHEN BERNARD The Associated Press
NEW YORK — The U.S. government is signaling it won’t throw a lifeline to struggling financial companies — except for mortgage linchpins Fannie Mae and Freddie Mac — marking a shift to a new and potentially more volatile phase of the credit crisis. Such an approach could mean beaten-down investment banks like Lehman Brothers Holdings Inc. and regional banks must now fend for themselves as they try to recover from billions of dollars in mortgage-related losses. That is bound to unnerve an already turbulent Wall Street and make investors even more anxious as they await financial companies’ earnings reports that are expected to be down a stunning 69 percent from a year ago when all the numbers are in. And, for consumers already squeezed by tightening credit standards, it could mean getting a mortgage will become even harder. The short-term uncertainty about Freddie Mac and Fannie Mae — which together hold or guarantee half the nation’s mortgage debt — was to an extent relieved on Sunday. Federal officials again threw their support behind the governmentsponsored enterprises; the Treasury pledged to expand its current line of credit to the two companies and the Federal Reserve said it will provide additional loans if needed. Treasury Secretary Henry Paulson also said the government could, if needed, buy equity capital in the companies, whose stocks lost half their value last week. The Treasury’s moves would require congressional approval. But, some of Wall Street’s biggest investors believe there was another message in the government’s announcement — the rest of the fi - nancial sector seems unlikely to get a helping hand. Global banks and brokerages have already written down nearly $300 billion in soured mortgage investments — a number projected to ultimately reach $1 trillion. “The credit crisis has obviously entered into a new phase — the government has one bailout left in them, and this is it,” said Jeffrey Gundlach, chief investment offi cer of TCW Group in Los Angeles, which invests $160 billion. “One consequence of Freddie and Fannie is that other firms are allowed to go under,” he said. “If you couldn’t get your act together after four months of unprecedented financing terms, maybe you don’t deserve to be thrown yet another lifeline.” Worries about financial companies failing intensified after a run on IndyMac Bancorp Inc. led to the bank’s takeover by the government on Friday. It wasn’t the Treasury or Fed helping to keep IndyMac in business, but a transfer of control to the Federal Deposit Insurance Corp. — which backs deposits on all the nation’s banks. Analysts said these kind of failures will curtail competition among financial institutions, which might in turn make it even harder for some borrowers to obtain mortgages, personal or auto loans or credit cards. On Wall Street, Monday could be a critical day, with investors quite nervous amid the uncertainty in the financial sector. Friday saw the Dow Jones industrial average dropping below 11,000 for the first time in nearly two years, and the overall market was down for the fourth week in a row. The government’s support of Fannie and Freddie in part was meant to assuage investors ahead of the opening, and also to reassure markets in Asia and Europe that will begin trading hours before the United States. Wall Street will gain a better sense of how concerned investors are with Fannie Mae and Freddie Mac’s future immediately today. Freddie Mac is scheduled to hold its weekly debt auction beginning at 8 a.m. EDT. The auction closes at 9:45 a.m., shortly after U.S. markets open. Freddie Mac is auctioning off a combined $3 billion in three- and six-month securities. Wall Street will be looking very closely at the number of bidders and the rate at which the securities are auctioned, said Bert Ely, a banking consultant who has been critical of the companies in the past. “I’ll be surprised if the results aren’t strong,” he said, noting the government was likely heavily encouraging investors throughout the weekend. The banking industry was already dealt a severe blow in March when Bear Stearns Cos. nearly collapsed amid the evaporation of its liquidity. JPMorgan Chase & Co. stepped in to purchase Bear Stearns in a deal orchestrated by the Federal Reserve. Bear Stearns was unhinged by mounting losses tied to investments in bonds backed by mortgages. As the mortgages increasingly defaulted, the value of bonds backed by the troubled loans tumbled. Financial companies’ reports of write-downs of troubled debt are likely to increase this week as some of the country’s largest institutions, including JPMorgan Chase, Merrill Lynch & Co. and Citigroup Inc., report second-quarter results. That trio has already taken a combined $73 billion in write-downs since the credit crisis began last summer. Lehman Brothers, whose shares have lost 78 percent since this year’s peak in February, is considered to be on the shakiest ground because it is the smallest Wall Street bank and has significant mortgage holdings. Last month, the investment bank announced it lost nearly $3 billion during the second quarter and was forced to offset that by raising $6 billion of fresh capital. Meanwhile, analysts believe regional banks in areas hardest hit by the real estate downturn are also at risk for failure. Some of the most bandied about names include Washington Mutual Inc., National City Corp., and Fifth Third Bancorp. “Fannie and Freddie are too big to fail only because of the repercussions, not to just the mortgage and housing markets but the entire financial market,” said Joe Balestrino, fixed-income market strategist at Federated Investors. “The U.S. is in disarray . . . these regionals could be gone. They are in a tough spot with housing and employment going south.”
Fannie Plan a `Disaster' to Rogers; Goldman Says Sell By Carol Massar and Eric Martin
July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.
Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.
Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies' shares may fall another 35 percent and lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17. Freddie Mac fell 64 cents, or 8.3 percent, to $7.11 in New York Stock Exchange trading, while Fannie Mae fell 52 cents, or 5.1 percent, to $9.73.
``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''
The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.
`Solvency Crisis'
Rogers, a former partner of hedge fund manager George Soros, predicted the start of the commodities rally in 1999 and started buying Chinese stocks in the same year. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''
Billionaire investor Soros said today that Fannie Mae and Freddie Mac face a ``solvency crisis,'' not a liquidity one, and that their troubles won't be the last financial disruption, Reuters reported.
``This is a very serious financial crisis and it is the most serious financial crisis of our lifetime,'' Soros told Reuters in a telephone interview. ``It is an idle dream to think that you could have this kind of crisis without the real economy being affected.''
`Going Bankrupt'
Fannie Mae and Freddie Mac each surged more than 20 percent in pre-market trading today after Paulson moved to stem a collapse in confidence in the two companies that purchase or finance almost half of the $12 trillion in U.S. home loans.
Fannie Mae's market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac's market value has shrunk to about $5 billion from $22 billion at the end of last year.
``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''
Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.
The Federal Reserve separately authorized the firms to borrow directly from the central bank.
`The Right Thing'
Anyone who says the mortgage-finance companies should be left to fail is ``silly,'' hedge fund manager Barton Biggs said in an interview on Bloomberg Television from New York.
``Fannie and Freddie are way too big and way too big a part of the mortgage system and really the American way of life to say `Just let them go bankrupt,''' said Biggs, a former Morgan Stanley strategist who now runs the hedge fund Traxis Partners LLC. ``The Treasury, in my view, is doing the right thing.''
Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.
Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.
Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.
The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.
``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''
only as the foreclosures increase......if the government buys equity in fanny/freddy which owns 50% of our mortgage debt,,,,it's just like taking away guns........eminent domain will be like a walk in the park compared to this......
...you are a product of your environment, your environment is a product of your priorities, your priorities are a product of you......
The replacement of morality and conscience with law produces a deadly paradox.
STOP BEING GOOD DEMOCRATS---STOP BEING GOOD REPUBLICANS--START BEING GOOD AMERICANS
Bank rescue plan ripples only starting BY MARTIN CRUTSINGER AND ALAN ZIBEL The Associated Press
WASHINGTON — 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 of dollars more if the crisis of confidence spreads. There were encouraging signs Monday for the rescue plan, but also signs of concern — notably on Wall Street, where shares of the two companies slumped further — that the plan won’t be enough. 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, to a paltry $3.23 amid worries about whether it had enough cash to handle the mortgage market downturn. WaMu said that it did. And worried customers lined up Monday to pull cash out of their accounts at Indy-Mac Bank, seized on Friday by the federal government. Some critics said they fear the Fannie-Freddie rescue effort will make more bailouts inevitable by sending a message that some institutions are too big to fail and thus encouraging risky behavior. “It sends the wrong message to the world,” said Joshua Rosner, managing director of research firm Graham, Fisher & Co. in New York. Sung Won Sohn, an economics professor at The Smith School of Business at Cal State Channel Islands, cited soaring oil costs, a weakening economy and an unstable housing market that he said will only get worse. “I don’t think these steps are enough to arrest the deterioration,” he said. As long as more homeowners default on mortgages, losses to financial institutions will mount. Those 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 also 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 he believes President Bush could sign by the end of next week. In a letter to Fed Chairman Ben Bernanke and Timothy Geithner, the president of the Fed’s New York regional bank, Treasury Secretary Henry Paulson said Monday that he saw any Fed loans as an interim step designed to serve as a bridge to legislation. He added the administration is pursuing legislation “urgently” with Congress to increase Treasury’s lending authority to the two institutions. Monday began with a good sign for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions which 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, and 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 the IndyMac failure, the largest since the collapse of Continental Illinois in 1984, would cost between $4 billion and $8 billion out of the agency’s $53 billion insurance fund. Analysts do not expect the volume of bank failures that happened from 1990 to 1992, when 834 of them folded. But the FDIC does plan to review whether to raise the fees it charges banks to beef up its insurance 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 $300 billion limit as too high. Treasury officials also said directly buying Fannie and Freddie stock would be a last resort. Substantial sums are involved in any event. 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. In Fannie and Freddie 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.
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