Right Now, No Takeovers For Freddie Mac And Fannie Mae From US Government

The Bush administration on Friday refused suggestions that the US Federal government might have to nationalize Freddie Mac and Fannie Mae, the giant mortgage companies that have unsettled the financial markets, as their shares plummeted to their lowest levels in nineteen years.

Hank Paulson, US treasury secretary, said: “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” signaling that the Bush administration was not contemplating a rescue takeover of the two groups and wanted public shareholders to continue owning them.

Describing Freddie Mac and Fannie Mae as “very important institutions”, President George W. Bush said that Secretary Paulson and Ben Bernanke, head of the Federal Reserve, would be “working this issue very hard”.

Fears that Fannie Mae and Freddie Mac could become the latest victims of the credit crisis have gripped investors this week. The two institutions are pillars of the US financial system, between them holding or guaranteeing nearly half of the $12,000bn in outstanding US mortgages and accounting for nearly three-quarters of new mortgages.

On Friday their shares fell 29 per cent and 23 per cent respectively in morning trading, after suffering losses of 14 per cent and 22 per cent on Thursday. Meanwhile, the Dow Jones Industrial Average fell below 11,000 for the first time in two years and crude oil prices spiked to a record above $147 per barrel on the New York Mercantile Exchange before falling back to about $144 per barrel.

As house prices have fallen and foreclosures have soared across the US, the two institutions have suffered deep losses, which they have tackled by raising more capital. Many observers believe that a collapse of Fannie Mae and Freddie Mac could bring the US mortgage market to a complete standstill, with severe repercussions for the financial sector and the economy as a whole.

Many investors in Fannie Mae and Freddie Mac have come to assume that the government would eventually come to their rescue because of their importance to the system. However, concern has risen recently that contingency plans for a government bail-out might involve wiping out public shareholders to minimize the cost to taxpayers, while confidence that senior debt would be protected has held up.

Bill Poole, former president of the Federal Reserve Bank of St Louis, who has not had any official contact with the Fed or Treasury since he left the Fed in March, said in an interview: ”I believe the Treasury and the Fed will do whatever is necessary to ensure troubles at Fannie and Freddie do not spark a worldwide systemic crisis.”

Joshua Rosner, managing director at Graham Fisher said: ”It is important to remember that these are private companies and the government cannot and will not step in before a financial institution is critically undercapitalized or insolvent.” The Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, has said this week that the two groups were “adequately capitalized”.  Mr Rosner added: ”Due to the fact that there is no real proscribed regulatory or legislated plan contingency planning is happening but it is premature to expect the government to take any actions prior to a determination of an inability of the GSEs to meet obligations.”

In his statement, Mr Paulson also said the administration “appreciated” efforts in Congress to enact legislation that would create a more powerful regulator for Fannie Mae and Freddie Mac. The housing bill he was referring to has been stuck in the Senate for several weeks amid opposition from a few Republican legislators, but could be approved as early as today, before moving to the House of Representatives. The bill also includes other measures to bolster the US housing sector, such as allowing the federal government to guarantee up to $300bn in mortgages refinanced at more affordable rates.