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Freddie Mac's Next Hurdle: Raise Cash
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If a crisis of investor confidence made it impossible to raise that money, the administration has several options. One would be to swap a portion of the troubled securities for Treasury bills, removing the immediate need to bolster capital. The cost of this approach would be whatever the losses might eventually be on the mortgage securities, possibly as little as a few billion dollars this year.
Another course would be to give the firms access to the Fed's discount window.
In the most extreme case, however, the administration could seize control, effectively nationalizing the firms and taking on their obligations. To the extent that there are losses on the firms' portfolios of loans and guarantees, those losses would add to the federal deficit. A loss of 1 percent, hypothetically, could add $50 billion to the deficit. There would be a small amount of offsetting income.
If the administration decided to curtail or shrink Fannie Mae and Freddie Mac at the same time, that could add wider economic costs, driving up unemployment and reducing federal and local government tax receipts further.
Another option would be for the administration to inject capital in exchange for shares with preference over others in receiving dividends or retaining equity value. Hoskins said that one condition of doing that should be to clearly eliminate the implicit federal guarantee for future loans. Benjamin Friedman, a Harvard University economist, would want the federal government to wipe out the remaining equity interest of existing shareholders.
Ultimately, however, any rescue plan would have to weigh the impact on the future housing market. Friedman said that removing the implicit government guarantee or shrinking the firms could change lending risk assessments and "the whole mechanism we built up over the past 30 years for channeling savings into debt against houses is going to have to be either reconstituted or the market will charge a higher interest rate."
He said that would mean fewer homes would be bought and built and there would be a change in "the ethos of the United States," which has always valued owner-occupied housing.
Staff writer Neil Irwin contributed to this report.
