Freddie Mac & Fannie Mae Continue To Fan Fears On Wall Street
Friday, July 11, 2008SUSIE GHARIB: Fear and uncertainty dominated trading on Wall Street today as worries about the future of Fannie Mae and Freddie Mac heated up. The stock value of the mortgage finance giants has been sheared in half, just this week alone. They're now trading at their lowest level in 15 years. Well, those pressures sent the Dow plunging over 250 points at one point in the day, but the index managed to cut that closing loss, ending the day down 128 points. Aiding the comeback was a report by Reuters that the Federal Reserve would let Fannie Mae and Freddie Mac tap the discount window for funds. But after the close of trading, a Fed spokeswoman told NIGHTLY BUSINESS REPORT while it's watching the situation closely; there have been no conversations between the Fed and the companies. Also late today, Freddie Mac said it has adequate capital and is highly liquid. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wall Street's big fear is that the two government-sponsored mortgage companies could go under or require a government bailout. Art Hogan of Jefferies says the prospect of either scenario has investors nervous.
ART HOGAN, CHIEF MARKET ANALYST, JEFFERIES & CO.: In the financial sector, people are concerned that there's another shoe to drop out there, so first it's Bear Stearns, and then comes Freddie and Fannie, and then, who's next?
MILLER: Roughly 70 percent of all U.S. mortgages pass through Fannie Mae and Freddie Mac's hands. Together they own or guarantee over $5 trillion in U.S. mortgage assets. For that reason, they are widely seen as critical to the recovery of the U.S. housing market and the overall economy. At a meeting with his economic team this morning, President Bush addressed the Fannie/Freddie crisis.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: First of all, Secretary Paulson came by this morning to brief me on the financial markets. Freddie Mac and Fannie Mae are very important institutions. We spent a fair amount of time discussing these institutions. He assured me that he and Ben Bernanke will be working this issue very hard.
MILLER: In addition, Treasury Secretary Henry Paulson issued his own statement, saying: "Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission." A source familiar with the administration's thinking says that statement is designed to quash speculation the government could nationalize the two public companies. But it was comments from Chris Dodd, the chairman of the Senate Banking Committee, that Wall Street found comforting.
SEN. CHRIS DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: These are very strong, viable entities today. The capital they have is good, it's in excess of what's required under federal law. This is not a time to be panicking about this.
MILLER: The market staged a comeback on what turned out to be an unfounded report that the Fed was going to extend its emergency discount window to Fannie and Freddie. But after the close, a Fed spokesperson said there has been no discussions with either company about that. Most Wall Street analysts believe the risk of either Fannie or Freddie going under is slim. But many do think the companies will require heavy infusions of capital. Investors are selling now, asking questions later. Fannie Mae shares plunged 46 percent this week alone. Freddie Mac even more. S&P market strategist Alec Young says it will be difficult for stocks to advance until there is clarity on the Fannie/Freddie crisis.
ALEC YOUNG, MARKET STRATEGIST, STANDARD & POOR'S: This is an issue for everyday investors because Fannie and Freddie's inability to function as they normally due means that its going to be harder to get a mortgage, home prices are going to stay weaker for longer, and bank profits and write- downs are going to be weaker than expected. And because of all those factors, Wall Street is likely to be under a cloud for a while.
MILLER: The turmoil at Fannie Mae and Freddie Mac is the latest turn in the year-old credit crisis. Just a few months ago, Wall Street was hoping the worst might finally be over. Now, it seems the troubles are growing. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
