US regulators take steps to aid Fannie, Freddie
The U.S. Federal Reserve and Treasury Department, in a dramatic step to help stabilize ailing Fannie Mae
will allow the firms to borrow directly from the Federal Reserve and have proposed giving the Treasury Department the authority to take an equity stake in the companies. In separate Sunday evening announcements, the Treasury and Fed made clear that the federal government sees it necessary to help the firms, which have seen their shares plummet over the last week amid fears about their solvency.
THE DETAILS: The Fed’s Board of Governors “has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary,” the Fed said in a statement.
“Any lending would be at the primary credit rate,” the Fed added. The primary credit rate, also known as the discount rate, is currently 2.25%.
The Treasury proposal, which would require approval by Congress, calls for a temporary increase in the $2.25 billion line of credit each of the two GSEs can draw on from the federal government. A senior Treasury official declined to say how large the new line of credit would be, saying only that it would be temporary - probably 18 months - and that the size, terms and conditions would be at the discretion of the Treasury secretary.
FED TO OFFER NEW MTGE RULES: New mortgage market rules being considered by the Federal Reserve Monday would help protect consumers from market abuses and boost market competition, Federal Reserve Chairman Ben Bernanke said.
FREDDIE DEBT SALE GOES WELL: The $3 billion Freddie Mac issuance Monday morning was stronger than expected, and came in tighter than quoted earlier. The $2-billion, three-month bill was awarded at 2.309%, after having traded at as much as 2.35% in the when-issued market. The $1-billion, six-month bill was awarded at 2.496% and had traded at as much as 2.55%.
FANNIE TO SELL BILLS: Fannie Mae will auction $2 billion of three-month benchmark bills and $1 bln of six-mo benchmark bills on Wednesday. Bids will be accepted beginning at 9 a.m. and the auctions close at 9:45 a.m.
THE MARKETS:
- Stocks are mixed after surging after the opening bell.
- Treasurys have rallied as the gain in stocks has been curtailed.
- The dollar is yo-yoing against the euro in tight ranges.
- Crude oil is slightly higher, remaining above the $145 mark.
HOLDING UP WELL: Short-term agency debt Monday is still in good shape, as the government’s Fannie Mae and Freddie Mac rescue plan and well-received Freddie Mac auctions eased fears about the mortgage giants well-being. The stability is a welcome sign for market participants, as some had worried that the growing distaste for Fannie and Freddie’s stocks could spill over into the debt market. So far though, appetite for agency debt has held steady.
DODD WANTS ANSWERS: Senate Banking Committee Chairman Christopher Dodd said Monday he will summon Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to a hearing Tuesday to answer questions about steps taken over the weekend to bolster Fannie Mae The Associated Press reported.
PLAYING HARDBALL: The White House said it won’t soften its concerns about Senate housing legislation in an effort to speed up Congress’s enactment of its Fannie Mae and Freddie Mac proposals.
ASIAN YAWN: A hurriedly drafted plan by the U.S. government to back mortgage giants Fannie Mae and Freddie Mac drew a muted response Monday from Asian investors, who regarded the move as positive but fear the tough times aren’t yet over.
WHAT THEY’RE SAYING: Merrill Lynch said that while Fannie Mae and Freddie Mac credit losses are likely to lead to capital erosion, both companies appear to be sufficiently capitalized for the next few quarters, Reuters reports. However, Merrill cut its Fannie price target to $9 from $22 and Freddie Mac from $20 to $7 as it expects higher credit losses to weigh on the shares.
The U.S. government’s plan to bolster Fannie Mae and Freddie Mac by increasing their federal lines of credit and possibly injecting equity capital won’t help the firms’ shareholders, Goldman Sachs analysts said Monday, repeating their recommendation that investors sell the shares.
While the stronger-than-expected $3 billion in Freddie Mac issuance was a positive, there will still be volatility around the GSEs for at least the short-term, said William Bellamy at Thompson, Siegel & Walmsley. “We need to see either Fannie or Freddie, or other financial institutions, to have the ability to raise capital,” he said. “That will allay some of the fears.”
“Ultimately, what the GSEs needed was a bridge loan,” Barclays Capital wrote. “The government is essentially guaranteeing one.”
“Stock markets may have a positive initial reaction from a deeply oversold position,” writes David Kotok, CEO of Cumberland Advisors. “Once this rally is over, the markets will have to confront the economic realties of our housing/energy/food/election-uncertainty/economic slowdown/pressured-consumer/large deficit/weak dollar situation.”