Sunday, July 20th, 2008
Fannie Mae and Freddie Mac Shares Boosted by Plans for Capital Raise, Government Help
By Jennifer Yousfi
Managing Editor
The future of Fannie Mae (FNM) and Freddie Mac (FRE) remains uncertain, but Treasury Secretary Henry Paulson continues to go to bat for the struggling mortgage titans that together secure half of the $12 trillion U.S. mortgage market.
Speaking on CBS News’ "Face the Nation," Paulson said, "I’m very optimistic that we’re going to get what we need from Congress," when asked about his plan for a government-sponsored rescue of Freddie Mac and Fannie Mae. "Congress understands how important these institutions are."
Paulson, with backing from President Bush, is urging Congress to expand the $2.5 billion government credit lines of Freddie Mac and Fannie Mae. The Treasury Secretary also would like authorization to purchase equity stakes in the two government-sponsored entities (GSEs), if needed.
"We’re very close to getting reform," Paulson said in a separate interview on CNN’s "Late Edition" program, Bloomberg News reported. "These are very important organizations — they have a very important role to play — and we need to make sure that [Fannie Mae and Freddie Mac] have access to adequate capital to get through this period."
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News of Paulson’s government rescue plan halted the multi-day slide and gave the two largest U.S. lenders a slight boost on Friday. Fannie Mae stock gained over 22% with an increase of $2.47 to close at $13.40. Freddie Mac, regarded as the weaker of the two, climbed 10% with a gain of $0.85 to close at $9.18.
Not content to pin its hopes on the whims of a Congress that is hesitant to shoulder U.S. taxpayers with a potential $6 trillion liability, Freddie Mac filed with the U.S. Securities and Exchange Commission to sell $5.5 billion in securities. Freddie Mac first pledged to its regulator, the Office of Housing and Enterprise Oversight, it would raise the capital in May in order to prop up its weak balance sheet. But due to its recent stock woes, Freddie could seek to raise as much as $10 billion in fresh capital, The Wall Street Journal reported.
"The market conditions that have contributed to this price decline are likely to affect our approach to raising new core capital including the timing, amount, type and mix of securities we may issue," Freddie said in its filing, The Financial Times reported.
Fannie Mae and Freddie Mac investors, worried about the solvency of the huge lenders and the dilution of shares any issuing of new securities will cause, led to widespread selling over the past several days that put downward pressure on both stock prices.
Fannie Mae is down over 65% year-to-date and Freddie Mac is down over 75% year-to-date. The loss in share value will cause Freddie Mac to sell a larger number of shares to raise the $5.5 billion in promised capital. Freddie Mac said it expects second-quarter results to be adequate to not require additional capital, Reuters reported.
"While this is encouraging, as it means that there does not appear to be a large loss (in the second quarter) that would have required a larger capital raise, we would note that weaker credit results will pressure near-term results," Credit Suisse Group AG (ADR: CS) analyst Moshe Orenbuch said in a research note concerning Freddie Mac’s plan.
News and Related Story Links:
- The Financial Times:
Freddie Mac secures SEC registration
- Bloomberg News:
Paulson Says ‘Very Optimistic’ Freddie, Fannie Plan Will Pass
- Money Morning:
Inside Wall Street: The Fannie Mae/Freddie Mac Bailout is Necessary - But Don’t Expect a Happy Ending
- Money Morning:
As Treasury’s Paulson Prescribes Bailout for Fannie Mae and Freddie Mac, Guru Jim Rogers Predicts an "Unmitigated Disaster"
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