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Fannie & Freddie Had A Big Fall

Market Watch Sunday July 13: In a dramatic statement released Sunday, the White House and Federal Reserve moved to give the mortgage giants the capital they need to survive the depression in the housing market and turmoil in financial markets that had left them dangling over a cliff.

Of most immediate importance, the Fed's board of governors voted to open up its emergency discount window to Fannie and Freddie. In addition, Treasury Secretary Henry Paulson announced that he will seek Congressional authorization to by stock in the two companies and increase the government's credit line.
At the moment, each company may borrow only $2.25 billion. In return for the capital, Paulson said that the Bush administration would ask Congress to grant the Fed a "consultative" role in the capital standards of the companies.
The housing rescue package that is nearing final approval by Congress would put in place a strong independent regulator for the companies is slowly moving through Congress. Paulson says he wants a new provision allowing the Fed to work hand-in-hand with the new agency. That would be a bitter pill for Fannie and Freddie, which have been at loggerheads with the central bank over the capital issue for years. It is not clear how Congress will react to Paulson's request. The Treasury secretary said he has been in close contact with the Congressional leadership over the weekend, so his request will not come as a surprise to lawmakers. It would be logical to attach the lifeboat for Fannie and Freddie to the housing rescue measure.

The Senate passed its version of the legislation last week and sent it back to the House of another vote. It is expected to get to President Bush for his signature before Congress leaves town for its summer recess at the beginning of August.
The House Republican leadership vowed to put politics aside to craft legislation. Fannie and Freddie are strange hybrid companies, known as government-sponsored enterprises. They were chartered by Congress but are owned by private shareholders.For years, Wall Street has believed that the government would never allow Fannie and Freddie to default. The companies have been able to sell debt at lower prices than their competition. But the agencies have grown to mammoth size. They own or guarantee $5.2 trillion of U.S. home mortgages.
July 13 Sunday (AFP): US Treasury Secretary Henry Paulson on Sunday unveiled measures to bolster housing finance organizations Fannie Mae and Freddie Mac, stressing their key role in the US housing market."Fannie Mae and Freddie Mac play an important role in our housing finance system, and they should continue to play this role in their current forms as shareholder-owned companies," White House press secretary Dana Perino said in a statement.

"This evening, after working with the companies, the Federal Reserve, and other regulators, Treasury Secretary Paulson outlined a plan that we believe will help add stability during this period. President (George W.) Bush directed Secretary Paulson to immediately work with Congress to act on this plan," she added.

"It is crucial that Congress quickly works to enact this legislation as a complete package along with the strong oversight reform legislation recently passed in the Senate," Perino added in her statement. Troubled mortgage giant Freddie Mac is aiming to sell off three billion dollars in securities on Monday following last week's meltdown, in a potentially decisive move to heal shattered investor confidence. The two government-chartered, shareholder-owned giants underpin some five trillion dollars in home loans, and the meltdown in their shares last week raised fears of a government bailout, or a possible worsening of the credit crunch.

July 14 (Bloomberg) -- The dollar rose for the first time in four days against the euro after U.S. Treasury Secretary Henry Paulson asked Congress for the authority to buy shares of Freddie Mac and Fannie Mae . The currency also climbed against the yen after the Federal Reserve said it will offer direct loans to the two largest U.S. mortgage finance companies, easing concerns that confidence in housing and financial markets will worsen.

Comments: Should I gloat, nah that would be in poor taste. Surely I cannot be the only one in the world to see Fannie & Freddie were bankrupt before. (For those interested pls read posting "Unconvincing Selling In The US" posted Friday 11 July and "Fannie & Freddie Sat On A Wall" posted on May 8 this year. Technically speaking, Paulson is asking for permission to use American's public money to bail out Fannie & Freddie - they have to bail them no doubt about that. All things being equal, the bailout would be another solid whack to pummel further the demise of USD. However, Fannie & Freddie seems to be the biggest "obstacle" that the market had been waiting for Treasury/Fed to do something about it. Now that they have finally, sentiment on USD and hence equity prices would swing to the positive side of things. Not all clear yet but I see some light.

photos: Catherine Hung Yan


Encik Wan said…
If you still believe in demand and supply, then this news is the final nail to the status of US Treasuries as 'safe haven'. See reaction of 20+ Year Treasury ETF, TLT on 11/7/08. For gold bugs, this is the final signal they have been waiting for : all financial assets including Treasuries fail to retain values
bindi said…
I believed that 6 months ago I penned in your blog (ie before you had your views in the mainstream print)that the subprime will not go away and will continue to haunt us till perhaps middle of next year but I remember vividly being replied by your goodself that the subprime will be contained and it has no bearing unless it hits the job market. Well, I think you were not right then and I believed this is the only the begining of a bigger meltdown causing to a major depression- not a mild recession. Again I take the differing view due to the fact that fundamentally everything is not right in the banking scene in the US of A.

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