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Bloomberg.com: News: "U.S. Reluctant to Bail Out Fannie Mae, Freddie Mac (Update2)

By Dawn Kopecki

U.S. Reluctant to Bail Out Fannie Mae, Freddie Mac (Update2)

By Dawn Kopecki

July 10 (Bloomberg) -- The U.S. government probably won't bail out Fannie Mae and Freddie Mac until the companies have used up other means to raise capital, said Joshua Rosner, an analyst at Graham Fisher & Co., citing conversations with policy makers.

``The government would not step up to support the enterprises until they've exhausted all options, including acceptance of significant shareholder dilution,'' Rosner, whose research firm is based in New York, said in a telephone interview. ``And if the government did have to get involved, I would expect equity holders would lose everything.''

Fannie Mae and Freddie Mac tumbled to the lowest in 17 years in New York trading after former St. Louis Federal Reserve President William Poole said the companies may need a government bailout and UBS AG analysts cut their price target for Freddie Mac stock. McLean, Virginia-based Freddie Mac was insolvent based on fair value accounting measures last quarter and Washington- based Fannie Mae may become insolvent next quarter, Poole said.

Fannie Mae and Freddie Mac, which own or guarantee almost half the $12 trillion of U.S. home loans, have raised a combined $20 billion in capital since December. While most of the fresh cash has come from preferred stock, Rosner said the companies may be forced to sell common stock, diluting existing holders.

``I don't think the companies seem to understand that they have no choice but to raise equity no matter how dilutive it is,'' Rosner said. ``And the federal government will not back them unless they do so.''

Shareholders Lose

The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding. In addition to those obligations, Fannie Mae has $831 billion in company bonds outstanding, while Freddie Mac has $644 billion, according to Bloomberg data.

Representative Spencer Bachus, the top Republican on the House Financial Services Committee that helps set policy for Fannie Mae and Freddie Mac, said U.S. lawmakers would be ``vigorous in their involvement'' if the companies were to fail.

``Before insolvency, there are all sorts of intermediate steps,'' Bachus said in an interview. ``One of our positions is going to be that before there is any taxpayer involvement, the creditors, investors and shareholders have to assume liability.''

Fannie Mae slumped $2.11 to $13.20 today, extending declines for the year to 67 percent. Freddie Mac tumbled $2.26 to $8, taking its 2008 slide to 77 percent. UBS AG analysts led by Eric Wasserstrom in New York increased Freddie Mac loss estimates, cutting their stock price target to $10 from $28 after meeting with Freddie Mac Chief Financial Officer Anthony Piszel and Controller David Kellerman, according to a report today.

They Won't Fail

Senator John McCain, the presumptive Republican presidential nominee, said the federal government can't allow them to fail.

Fannie Mae and Freddie Mac ``are vital to Americans' ability to own their own homes,'' McCain said in response to a reporter's question during a campaign stop at a diner in Livonia, Michigan. ``They will not fail; we cannot allow them to fail.''

U.S. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said Fannie Mae and Freddie Mac won't go under, and Senator Charles Schumer said a collapse is highly unlikely ``because the federal lifeline has always been there.''

``I think it would be devastating to the economy to let them go under,'' said Schumer, a New York Democrat. ``We should try everything else first, but that's something that would have to be on the table, absolutely.''

U.S. Treasury Secretary Henry Paulson told lawmakers in Washington 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 testimony to the House Financial Services Committee.

Need More Capital

Federal Reserve Chairman Ben S. Bernanke, who also spoke at the hearing, said the government-sponsored enterprises should raise more capital.

``The GSEs are playing a critical role at this point, a very big part of the existing mortgage market,'' Bernanke said. ``I think they could do an even better job if they were better supervised and better capitalized.''

Boston Advisors LLC has been selling its shares of Fannie Mae and Freddie Mac, Michael Vogelzang, the chief investment officer, said in a Bloomberg Television interview from Boston.

``I don't want to be a shareholder here because I don't know how you put a value on something that's got negative capital right now,'' he said. ``We've been selling ours.''

Company Response

The government is counting on Fannie Mae and Freddie Mac 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 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.''

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.

``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.''

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.
Last Updated: July 10, 2008 16:26 EDT