Fannie Mae & Freddie Mac's Capital Concerns
Thursday, July 10, 2008SUSIE GHARIB: Fannie Mae and Freddie Mac have adequate capital. That was the word late today from the regulator overseeing the two mortgage finance giants. The Office of Federal Housing Enterprise Oversight said that both companies have large portfolios, access to new lending and $1.5 trillion in assets. Those comments came after the stocks fell sharply for the second straight day on Wall Street. Meanwhile, at a hearing on Capitol Hill today, lawmakers grilled Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson about the future of Fannie and Freddie. Washington bureau chief Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is a treasury secretary's job to try to calm the waters, and the surf was up this morning. As Henry Paulson sat down to testify before Congress, shares of Fannie Mae were off almost 22 percent, Freddie Mac off more than 30 percent on growing concerns over their liquidity. Then Paulson spoke.
HENRY PAULSON, TREASURY SECRETARY: Fannie Mae and Freddie Mac are also working through this challenging period. They play an important and vital role in our economy and housing markets today and they need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalized.
GERSH: That was enough to halt the slide in the shares of the so-called GSEs or government-sponsored enterprises. But Standard & Poor's now warns Freddie Mac, in particular, will find it difficult and expensive to raise the billions of dollars in new capital it needs. Fed Chairman Ben Bernanke urged the GSEs to hurry up and find more cash.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: We've called upon all financial institutions to expand their capital bases, so that they can be even more proactive in providing credit and support for the economy. So I would include the GSEs in that broad call for increased capital.
GERSH: How important are Freddie and Fannie? Together the two companies provide the insurance that backs up seven out of every 10 new mortgages in the country. Given that, former Fed Governor Lyle Gramley calls a Fannie or Freddie failure unthinkable.
LYLE GRAMLEY, FORMER FEDERAL RESERVE GOVERNOR: Fannie and Freddie are much too big to fail. That simply can't happen. If Fannie and Freddie have liquidity problems, the Fed can help out. The Fed has bought Fannie and Freddie securities before, they haven't in recent years, but they have before. And I'm reasonably sure they would again.
GERSH: Congress got the message. A housing rescue bill cleared a key Senate vote today, setting up passage by the end of the week. Senate Banking Committee Chairman Chris Dodd says Fannie and Freddie need the help.
SEN. CHRIS DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: Recent news makes clear that these entities need a strong regulator to ensure they are viable and help the institutions. It also raises loan limits from $417,000 to as high as $625,000 so that the GSEs can play an even more active role in stabilizing the housing market.
GERSH: The presidential campaigns also jumped in on the GSEs. John McCain said Fannie and Freddie would not be allowed to fail. An adviser to Barack Obama called the mortgage giants troubles a sign of the overall weakness of the economy. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
