Transcripts

Freddie & Fannie Can't Fail

SUSIE GHARIB: It was a jittery day on Wall Street in the wake of the government's rescue of mortgage giants Fannie Mae and Freddie Mac over the weekend. While shares of the stocks spiked in early trading, Fannie closed down $0.52 or 5 percent at $9.73. Freddie stock ended off $0.64 or 8 percent at $7.11. And financial stocks overall fell sharply. In Washington, lawmakers assessed the emergency move by the Treasury and the Federal Reserve and worked on getting congressional approval. We have two reports tonight looking at reaction to Fannie Mae and Freddie Mac action on Wall Street and on Capitol Hill. We begin with Scott Gurvey in New York.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The government decision to stand behind the two mortgage industry giants had a noticeable impact on bond traders today. Freddie Mac's regularly scheduled auction of $3 billion in short-term debt came off better than expected. That indicates investors have confidence in the safety of Freddie Mac's debt securities. But while investors bought Freddie's short-term notes, they did demand a premium over similar Treasury issues. Jerry Webman of OppenheimerFunds says that is understandable.

JERRY WEBMAN, DIRECTOR OF FIXED INCOME, OPPENHEIMERFUNDS: Some of it has to do with issues like the callability of these bonds and at least of some of their debt. It has it do with relative liquidity. But you know, this is still a slightly more explicit guarantee, but it's still not full faith and credit of the U.S. federal government.

GURVEY: If federal officials expected to see a rebound in the stock price of Fannie Mae and Freddie Mac, they were disappointed. After a big move up at the open, both stocks closed below last week's levels. Market watchers say that's because the future of Fannie and Freddie's equity is uncertain. Most experts expect the government to buy an equity stake in one or both of the companies. That new capital would let the firms continue their mortgage support operations which are essential to the housing market. But that could greatly dilute the stock of current shareholders. Cary Leahey of Decision Economics says Wall Street is afraid that along with the government money, which Wall Street likes, comes government oversight, which it does not.

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: The Federal Reserve, which has been no friend of Fannie and Freddie, is now going to have a consultation role in overlooking their books. I have a feeling one of the deals for Freddie and Fannie to go to the discount window is that a horde of Federal Reserve accountants is probably over at those building checking the books, which is one thing I don't think those two agencies ever wanted happening.

GURVEY: Analysts do not expect to see much of a recovery in Fannie Mae and Freddie Mac shares until Washington makes its next move. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.