Does A Bailout Loom For Fannie Mae, Freddie Mac?
MELISSA BLOCK, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.
MICHELE NORRIS, host:
And I'm Michele Norris. Not a day goes by without more evidence of the shrinking economy, from lending organizations in trouble to shrinkage on our grocery shelves.
In a moment, we'll find out how makers of soap, ice cream and cereal are reducing the size of their products without reducing the cost. Also, we'll hear from people who are driving less. No surprise. That's thanks to high gas prices.
BLOCK: First, the precarious position of Fannie Mae and Freddie Mac. Those are the two private government-chartered companies that own or guarantee nearly half of all the nation's mortgage debt. Their stock values are plummeting. Fannie Mae is down nearly 80 percent from its price a year ago, and now, as NPR's Jim Zarroli reports, there's talk that a taxpayer bailout may be necessary.
JIM ZARROLI: Fannie Mae and Freddie Mac play a pivotal role in the U.S. mortgage business, and so it was perhaps inevitable that they've become swept up in the housing industry turmoil.
On Monday, shares of the companies fell after an analyst warned that a pending accounting rule change would leave the companies undercapitalized. Government regulators quickly disputed that, but the tone was set.
Today, the Wall Street Journal reported that the Bush administration is developing contingency plans for the collapse of the companies, and shares fell even more. On Capitol Hill, Treasury Secretary Henry Paulson tried to voice some reassuring words about the companies.
Secretary HENRY PAULSON (United States Department of Treasury): They play an important and vital role in our economy and housing markets today, and they need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalized.
ZARROLI: But at the same time, former Fed Governor William Poole warned that the companies were insolvent and may need a government bailout, and that sent share prices tumbling even further. The likelihood of a government bailout of the companies was something being talked about more and more today. Economist Mark Zandi of Moody's Economy.com and advisor to Republican presidential candidate John McCain said the companies may need to issue more shares of stock to raise money. That would dilute the value of existing shares, but Zandi also says it's unlikely the government will allow the companies' troubles to go much further.
Mr. MARK ZANDI (Moody's Economy.com): Unless you're a shareholder, I wouldn't be worried because there's no chance the federal government would allow these institutions to fail, to stop doing business. It would just be catastrophic for the system, for our economy. It's just not going to happen.
ZARROLI: The companies' troubles even became fodder for the presidential race. An advisor to Democrat candidate Senator Barack Obama said it was critical to maintain a flow of capital for the companies. Senator McCain told reporters that Fannie Mae and Freddie Mac, quote, will not fail. We cannot allow them to fail, unquote.
Later, McCain backed off the comments a bit, insisting that the two companies' troubles could still be addressed.
Senator JOHN McCAIN (Republican, Arizona): At this time I don't think that there's a requirement for a government bailout, so we will have to discuss the options that are available in order to keep it viable, and that's what I would hope that we could do with various experts and people of knowledge throughout the country.
ZARROLI: By the end of the day, a spokesman for Fannie Mae insisted that the company maintains the capital to fulfill its mandate and keep doing business, but the concerns about the company seemed unlikely to ease anytime soon. The impact of their troubles could be seen in shares of the troubled investment bank Lehman Brothers, which fell sharply today.
One factor driving its stock down was said to be the significant exposure it faces to Fannie Mae and Freddie Mac. Jim Zarroli, NPR News, New York.
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