Corporate Governance

Hope for Fannie and Freddie?

By Tamar Weinrib

Yesterday, the government announced a plan designed to renew confidence in the suffering Fannie Mae and Freddie Mac, which would allow them to continue to function as shareholder owned companies.  Under this plan, the Bush administration said it would ask Congress to authorize the Treasury Department to lend more money than current limits permit and buy stock in the two companies.  The Federal Reserve also agreed to permit the companies to borrow directly from the central bank, as investment firms were allowed to do after the near-collapse of Bear Stearns Cos. in March.   The Fed will also have a consulting role in the companies? oversight going forward in an effort to alleviate shareholder concern.

Fannie Mae and Freddie Mac, government-sponsored enterprises or G.S.E.?s, have been hit hard by the mortgage foreclosure crisis. Their shares had been plummeting and their borrowing costs have been rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. As housing prices continue to decline and foreclosures continue to grow, the markets have shown signs of concern that Fannie and Freddie may default on their debt.  This threat is particularly troubling because the companies deal with close to half of the nation?s mortgages, totaling around $5.2 trillion, by either owning or guaranteeing them, and the debt securities they issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds, big companies and other large institutional investors.  Currently, Fannie and Freddie combined have capital cushions of only $81 billion and just $2.25 billion each in credit lines from the Treasury. The government plan will increase that limit and will hopefully to halt Fannie and Freddie?s plummeting shares which hit close to 16-year lows last week. 

Though many, including those that are generally vociferously opposed to government regulation, argue that the plan is warranted because Freddie and Fannie are "too big to fail", there is also criticism that the plan is a mere band aid that will ultimately pass on high costs to taxpayers. 

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Full post as published by PomTalk on July 14, 2008 (boomark / email).