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Bailout Vow Does Little To Aid Fannie, Freddie

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Bailout Vow Does Little To Aid Fannie, Freddie

Business

Bailout Vow Does Little To Aid Fannie, Freddie

Bailout Vow Does Little To Aid Fannie, Freddie

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Congress' approval last month of a bailout of Fannie Mae and Freddie Mac was meant to reassure anxious investors. It hasn't worked out that way, however. Investors' confidence in the companies is dwindling and there's still much uncertainty over how a bailout will work.

MICHELE NORRIS, host:

The news keeps getting worse for Fannie Mae and Freddie Mac. Last month, Congress approved a rescue plan for the two mortgage giants, but since then, their stock prices have fallen and they've had to pay higher interest rates on the money they need to operate.

Now, there's a lot of speculation that Fannie and Freddie may soon actually need to turn to the federal government for help. NPR's Jim Zarroli reports.

JIM ZARROLI: When Congress approved its extraordinary bailout of Fannie Mae and Freddie Mac last month, members hoped it would be enough to reassure anxious investors. It hasn't worked out that way, says Bob Litan, vice president for research and policy at the Kauffman Foundation.

Mr. BOB LITAN (Vice President for Research and Policy, Kauffman Foundation): They were nervous before the Congressional action authorizing the government to intervene if necessary, and if anything, they're even more nervous now.

ZARROLI: Fannie Mae and Freddie Mac are critical to the U.S. housing market, guaranteeing half of the mortgages issued in the country. And if they can no longer do so, it would send mortgage rates sharply higher.

Under the terms of the bailout, the federal government agreed to pour capital into the companies if their condition deteriorated too much. Again, Bob Litan.

Mr. LITAN: That should have comforted the bond holders and all the debt that's been issued by both Fannie and Freddie, but nonetheless there's still some nervousness out there because the spreads on their debt have gone up.

ZARROLI: In other words, since the bailout both Fannie and Freddie have had to pay somewhat higher interest rates to attract the capital they need to operate. That's a sign investors have dwindling confidence in the companies, and that's for the best securities the companies sell, those guaranteed by the federal government.

Some of their other debt has been down-graded by bond-rating agencies, and their stock prices continue to fall. Why, despite the federal government's best efforts, are investors still so scared? Victoria Wagner, analyst at Standard & Poor's, says there's still a lot of uncertainty about how a bailout would work.

Ms. VICTORIA WAGNER (Analyst, Standard & Poor's): We're in unprecedented times. We don't know how the Treasury actions will play out.

ZARROLI: If the government is forced to pump capital into Fannie Mae and Freddie Mac, some investors would fare better than others. Ordinary homeowners, whose mortgages are owned by the companies, wouldn't be affected. People who bought bonds issued by the companies might get much of their money back, but stockholders would probably see their holdings wiped out.

None other than Warren Buffett said on CNBC this morning that the companies are facing such big losses in the mortgage market that their stock is practically worthless.

Mr. WARREN BUFFETT (Investor): At a practical sense, as institutions, they don't have any net worth. I mean if you look at their obligations and look at the fact they have big deferred tax assets as assets, they're - they would have been gone in any market where the government wasn't behind them long, long ago.

ZARROLI: But as Buffett noted, the government is behind the companies, which means they have a backstop other companies don't have, and no one really knows for sure what will happen. Many people believe a government bailout is all but inevitable.

The companies need to hold a certain amount of capital on their books. If they can't do that, they won't be able to purchase mortgages, and the housing industry will slow even more than it has already.

Buffett says it's unlikely right now that Fannie Mae and Freddie Mac can raise the money they need to keep operating from private investors. That means sooner or later, the government will have to make good on the promises it made last month.

Jim Zarroli, NPR News, New York.

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