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Report: Treasury Will Inject Capital Into Fannie, Freddie

Posted Sep 05, 2008 05:50pm EDT by Aaron Task in Investing, Newsmakers, Recession, Banking
"Here comes the official government bailout of Fannie Mae and Freddie Mac. "

That was my first reaction to The Wall Street Journal's story late Friday declaring: "The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac."

"An announcement could come as early as this weekend," the Journal reports, leading to my second reaction: Not another weekend bailout!

Reaction number three: Is this why the stock market bounced Friday afternoon, despite the grim jobs report and with financials leading the way? ("You think with Morgan Stanley involved [as advisers] something could have leaked? Naaah," one source quipped with evident sarcasm.)

As for the news at hand: The structure of any presumptive deal remains a mystery. "The plan is expected to involve a creative use of Treasury's new authority to make a capital injection into the beleaguered giants," the Journal reports. Notably, Fannie and Freddie shares tumbled after hours Friday on speculation whatever form the injection takes, such as convertible preferred shares, would dramatically dilute and reduce the value of existing shares. 

The Housing Bill passed by Congress and signed into law by President Bush in July granted the Treasury the authority to inject capital into Fannie and Freddie and/or buy its shares outright. In theory, Treasury could spend as much as $800 billion on the troubled lenders, or the amount the government's debt ceiling was raised by the bill, The New York Times reported.

"The two entities are too important for the government to let them fail," Diane Garnick, investment strategist at Invesco, comments via email.  "The plan need(s) to create a short-term solution to provide relief to the immediate credit crisis while simultaneously providing some type of penalty for those who overextended themselves.  Without the penalty, the moral hazard risk would loom too large."

Clearly this is a fluid situation and anything is possible, although another source notes the law doesn't take effect until Oct. 1, so we may all be getting ahead of ourselves.

What does seem clear at this moment is the government is unlikely to formally nationalize Fannie and Freddie, as many observers had speculated could (and should) happen.

Although credit spreads have been relatively stable of late, that something is happening isn't a big surprise, given it was a big part of the Housing Bill, the housing market remains in distress, unemployment is rising, the stock market had a rough week - and let's not forget it's an election year.

"But the timing of this coming after Bill Gross's missive yesterday really rankles," Paul Kedrosky writes on Infectious Greed. "Does everyone have to hop every time Gross complains?"

Put another way: Is Pimco, which has nearly $830 billion in assets and is one of the largest private holders of both U.S. Treasury and Fannie/Freddie debt, too big to fail?

88 Comments

Kev
Kev - Friday September 05, 2008 08:46PM EDT

If it wasn't for the damn press we'd most likely not even be in this situation. Too much talk with a bunch of heard mentality minded people listening to every word. Why are we in this mess in the first place! Obvious that the current administration has left the common stockholder without a paddle once again! If they think this will resolve the situation on hand then they are sadly mistaken. It's going to take much more. Let's see how this ends up turning out. I doubt anyone but big business will end up profiting as usual.

Tom
Tom - Friday September 05, 2008 08:55PM EDT

I bailed out.....guess I was right afterall! so take the loss carry forward and buy bank stocks they will benift from the bailout.

B
B - Friday September 05, 2008 09:00PM EDT

I was wondering why I had not heard about any more bank closings, I googled FDIC bank failures.... its unreal... up to 30 from 9 just 2 weeks ago. Its going to be a cover up that cannot be swallowed by the tax payers. NO WAY. The feds have a website that lists the name of the bank and the month if failed... look at 2008.... Bail them out? Screw them. Let the chips fall where they may my old Commanding Officer use to say. Todays big news was about a UPS truck that went 1million miles. Get Real.....The Media has no spine to report whats really happening. I have watched the conventions... VOTE and hope to hell someone cuts the cord on this mess. Evgeniy your right on. And to the Imigrant turned from Canibal to Christian, God ain't in this one, only the Devil is on Wall Street and in DC, lol.....

road warrior
road warrior - Friday September 05, 2008 09:31PM EDT

I am in general a conservative, but I have to disagree with the poster who compares buying shares in FNM and FRE to buying PET.COM shares. Folks investing in these companies were after the dividend and assumed these to be very safe investments. There is no way that wiping common in these companies would not come back to haunt us. Tax-payers will end up paying one way or another - when all the pensioners who relied on the GSE for income - directly or indirectly - would need supplemental income. I also don't know of any other country in the world that would let their major banks fail. Japan didn't, and neither did China, nor Russia. I think defending these financial institutions is a matter of national security. We cannot afford for the world to lose confidence in our financial system. We aren't defending unscrupulous investors who put their money in PET.COM - this is FNM and FRE we are talking about. If they aren't safe then nothing is - not even treasuries.

road warrior
road warrior - Friday September 05, 2008 09:31PM EDT

I am in general a conservative, but I have to disagree with the poster who compares buying shares in FNM and FRE to buying PET.COM shares. Folks investing in these companies were after the dividend and assumed these to be very safe investments. There is no way that wiping common in these companies would not come back to haunt us. Tax-payers will end up paying one way or another - when all the pensioners who relied on the GSE for income - directly or indirectly - would need supplemental income. I also don't know of any other country in the world that would let their major banks fail. Japan didn't, and neither did China, nor Russia. I think defending these financial institutions is a matter of national security. We cannot afford for the world to lose confidence in our financial system. We aren't defending unscrupulous investors who put their money in PET.COM - this is FNM and FRE we are talking about. If they aren't safe then nothing is - not even treasuries.

road warrior
road warrior - Friday September 05, 2008 09:33PM EDT

I am in general a conservative, but I have to disagree with the poster who compares buying shares in FNM and FRE to buying PET.COM shares. Folks investing in these companies were after the dividend and assumed these to be very safe investments. There is no way that wiping common in these companies would not come back to haunt us. Tax-payers will end up paying one way or another - when all the pensioners who relied on the GSE for income - directly or indirectly - would need supplemental income. I also don't know of any other country in the world that would let their major banks fail. Japan didn't, and neither did China, nor Russia. I think defending these financial institutions is a matter of national security. We cannot afford for the world to lose confidence in our financial system. We aren't defending unscrupulous investors who put their money in PET.COM - this is FNM and FRE we are talking about. If they aren't safe then nothing is - not even treasuries.

road warrior
road warrior - Friday September 05, 2008 09:33PM EDT

I am in general a conservative, but I have to disagree with the poster who compares buying shares in FNM and FRE to buying PET.COM shares. Folks investing in these companies were after the dividend and assumed these to be very safe investments. There is no way that wiping common in these companies would not come back to haunt us. Tax-payers will end up paying one way or another - when all the pensioners who relied on the GSE for income - directly or indirectly - would need supplemental income. I also don't know of any other country in the world that would let their major banks fail. Japan didn't, and neither did China, nor Russia. I think defending these financial institutions is a matter of national security. We cannot afford for the world to lose confidence in our financial system. We aren't defending unscrupulous investors who put their money in PET.COM - this is FNM and FRE we are talking about. If they aren't safe then nothing is - not even treasuries.

Wing
Wing - Friday September 05, 2008 11:09PM EDT

Damages were done and couldn't be undo, the infection is spreading rapidly, fever occured. It's useless no matter how vocal your voice will be, control is still in the Gov. and the big guys hands, all you could do is how to stop the inflamation and recovery. The next 6 months will be one of the worst half years in the history because there are another 2/3 of the veiled bad loan are ready to emerge, more banks will be taken over by the Gov. This is a world of predator, WE little people are always on the bottom of the food chain. All laws and rules are just for sugar coating and all news from wherever sources must has its own interest behind it. However, there is still lots of valuable information in it, make good use of it, but you don't have to believe it totally, use your natural instinct to justify. US has been living on debt since 30 years ago plus the war and the world wide financial crises. Personally, I don't think our Gov. is capable to safe the mortage giants but keep giving you high dose of numbing pills until the pills are no longer effective, by then you are already a piece of dead meat . Don't be so naive to think that our Gov. will help you, you are the only one to save yourself.

Scott M
Scott M - Friday September 05, 2008 11:26PM EDT

Freddie Mac and Fannie Mae stocks are NOT the same as US Treasuries. Just to make this clear, I will repeat. Freddie Mac and Fannie Mae stocks are NOT the same as US Treasuries. Freddie Mac and Fannie Mae stocks were NOT backed by the full faith and credit of the US government. Just to make this clear, I will repeat. Freddie Mac and Fannie Mae stocks were NOT backed by the full faith and credit of the US government.

ClareP
ClareP - Friday September 05, 2008 11:35PM EDT

You take a risk when you buy shares in a company. That's why they call it "investing" instead of "free money for you". Of course the shareholders should loose out. We put our money in a poorly run company and now it's going down the tubes, it's called capitalism folks, that's the way the system works. The government wouldn't be bailing them out except for the fact that our economy would most likely collapse if they didn't. The taxpayers are the ones getting screwed as usual.

Robin M
Robin M - Saturday September 06, 2008 12:26AM EDT

I lost money on Wachovia Bank, when will my Government bailout check arrive, can anyone tell me?

give_you_goosebumps
give_you_goosebumps - Saturday September 06, 2008 12:55AM EDT

The rich get richer and the poor get poorer. This isn't Capitalism, it is Socialism. We better privatize the airlines and automakers wjile we are at it. Better yet, privitize the nation. Then we can let the government crooks turn us into a third workd nation. FRE and FNM was an inside job from the beginning. Greenspan-Gross should run for the Presidency. If they weren't so greedy and selfish they would play by the rules. But then again, they make the rules! In this crappy market I just wish I had something with a gain (what is a gain?!) to net out my losses in these two Trojan horses called GSE's. I am just so elated that it is the taxpayer and not Greenspan-Gross taking it on the chin! How did Gordon Gecko out it, "Greed is Good". Notice all the G's, must be some kind of Bible Code. See you all at the Long Term Capital Loss line!

Yahoo! Finance User
Yahoo! Finance User - Saturday September 06, 2008 01:11AM EDT

Thanks to our president... Nice Jobs Bush.

Balasubramanian
Balasubramanian - Saturday September 06, 2008 01:49AM EDT

$ 800 Billion!!!! Here comes the biiiiiiig inflation.... $ 29 billion in a weekend deal for Bear Stearns took Gold to $ 1035/oz. Wonder what $ 800 billion will do!!

Yahoo! Finance User
Yahoo! Finance User - Saturday September 06, 2008 01:54AM EDT

if that's true and that the bailout comes the week end the market gonna open some 2 to 3% higher, where it closed down on wednesday probably

Yahoo! Finance User
Yahoo! Finance User - Saturday September 06, 2008 05:14AM EDT

Yet another example of how bogus our "free market" is. Yet more government meddling and yet another bailout using taxpayer (little guy) money to bail out the status quo at the expense of the little guy (shareholder). Watch the market go crazy on Monday. Not because any of the companies whose shares go up 10% are good, well-run companies, but rather because the government again reminds us one more time that there is no penalty for business being reckless, abusive and corrupt.

omglook
omglook - Saturday September 06, 2008 05:26AM EDT

Another example of Republican BS? Small government. yea right. How does McCain think he is going to cut taxes while spending a billion a day on a war in Iraq, and a trillion plus a year bailing out private businesses to line the pockets of cronies? Oh yeah, more national debt! If people in this country are stupid enough to vote the crooks and liars back into office in November, I'm immigrating. This country is going to hell in so many ways right now.

omglook
omglook - Saturday September 06, 2008 05:40AM EDT

My guess is the market will be up 3-4% on Monday, with the XLF going nuts. If you are short through options, too bad. If you are short through ETFs, just hold on. The market will tank again back to at least 11000, probably lower. Like previous bailouts, this is just sucking wind to let insiders get out of bad positions and get richer. In the long term, it doesn't do anything but postpone the inevitable. Why? A bailoud does nothing to address the real problem, which is individuals suffering under bad mortgages and job losses. This is just another money-shifting exercise.

Balasubramanian
Balasubramanian - Saturday September 06, 2008 05:55AM EDT

omglook, Sorry to be a wet blanket, but it's much worse anywhere else on the planet. So I wonder where you will go...

__A_YAHOO_USER__
__A_YAHOO_USER__ - Saturday September 06, 2008 06:11AM EDT

If the lender can not pay....Why not the government buy their property and rent them back instead to them at affordable price.Than expensive repossession........Democrazy is not only owning property but also renting property that we called home.I call Mr. Obama or Mr Mcain....Will they do something better than this.

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