The Bond Market Throws A Life Ring To Freddie Mac
Monday, August 25, 2008PAUL KANGAS: Keeping Fannie Mae and Freddie Mac in the mortgage business is a key concern of their regulators, the U.S. Treasury and the Federal Reserve. Today the bond market lent a hand. Freddie Mac's $2 billion offering of short-term debt was successfully sold, albeit at a premium over comparable Treasuries. As Stephanie Dhue reports the future for Freddie Mac and Fannie Mae remains uncertain.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: When you own or guarantee $5 trillion worth of mortgages, to say the dismal state of the housing market is bad news is an understatement. That's what Fannie Mae and Freddie Mac are facing right now. And that's why Dean Baker of the Center for Policy and Economic Analysis says it will be hard for the companies to hold on for more than six months in their current state.
DEAN BAKER, CO-FOUNDER, CTR FOR ECONOMIC & POLICY RESEARCH: We're seeing more downward pressure on the housing market. Nothing's going to change. We're going to see feedback from the bad news in the labor market because people losing their jobs means more delinquencies, more defaults.
DHUE: So what's the future for Fannie and Freddie? Some say, it makes sense for the Federal government to take them over completely.
BAKER: In principle, what we want Fannie and Freddie to do is to buy up fairly standard mortgages, package them into mortgage-backed securities and sell them again in the secondary market, which in principle is a very simple task.
DHUE: But Fannie and Freddie's quasi-public government sponsored entity status keeps their liabilities off the U.S. government's balance sheet. AEI's Alex Pollock says that's something lawmakers may want to keep. If the government does step in, he recommends a plan that doesn't wipe out current shareholders.
ALEX POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE: My recommendation would be to structure a government investment that leaves the current shareholders, both current shareholders and preferred shareholders with a stake in the future, but no dividends in the meantime, no common dividends, no preferred dividends until the recovery has taken place and the government's investment is paid off.
DHUE: That type of scenario would leave Fannie and Freddie as a public utility of sorts, with a slow growth model. Ultimately, bond buyers may make the determination if they refuse to support the companies' debt.
POLLOCK: The real question is, does the bond market or when does the bond market say, well, the commitment is nice, but we'd like to see some real money put into these companies in the form of capital, not in the form of more loans.
DHUE: Part of Fannie and Freddie's future has already made its way into presidential politics. Today, Barack Obama weighed in, saying the firms are too important to the financial system for the government to let them fail. John McCain has made similar statements. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
