Fannie, Freddie On a Tightrope

(Photo By Jae C. Hong -- Associated Press)
  Enlarge Photo    

Network News

X Profile
View More Activity
By Jeffrey H. Birnbaum and Christopher Twarowski
Washington Post Staff Writers
Tuesday, July 29, 2008

The collapse in the stock prices of Fannie Mae and Freddie Mac earlier this month, followed by an equally dramatic rebound, underscored the vulnerability of today's agitated markets to panic and the mercurial behavior of global traders.

Financial experts said the drop, nearly 50 percent in a week, was precipitated by a series of alarming reports from analysts and in the media and was then turbocharged by a surge in short selling, bets made by investors that the shares would fall.

The federal government's response -- an unprecedented Treasury rescue plan approved by Congress this weekend, along with a move by the Securities and Exchange Commission to stop an especially troublesome type of short selling -- prompted a surge in the stock prices.

But the actions did not solve fundamental problems still facing the mortgage finance giants, especially their low levels of capital relative to those of other financial firms. The companies' leaders acknowledge that the rescue plan alone will not end the stock volatility or ease concerns about whether Fannie Mae and Freddie Mac have the resources to weather the financial crisis in coming months.

"I don't think it will end the debate," Richard F. Syron, chief executive of Freddie Mac, said in an interview last week.

The precise balance between their public duties as government-chartered companies and obligations as investor-owned enterprises remains disputed.

Like other financial firms, Fannie Mae and Freddie Mac are under pressure to boost their capital reserves to compensate for mounting losses in the mortgage market. But if they do, they would have less money for their unique mission of supporting home lending across the country at a time when other lenders are fleeing the market.

"There's a lot of vulnerability out there, and we need to remain vigilant," Fannie Mae chief executive Daniel H. Mudd told CNBC earlier this month. "There is a lot of work to do."

Critics of Fannie Mae and Freddie Mac have fought in Congress for a decade to force the companies to build up their capital, fearing a calamity in the financial markets if the mammoth companies falter. These appeals went largely unheeded until late last year, in part because of the companies' potent lobbying efforts. Fannie Mae fulfilled a promise to regulators to raise more capital this year; Freddie Mac has not yet done so.

With housing prices falling and foreclosures skyrocketing, Fannie Mae and Freddie Mac have suffered combined losses of $11 billion in the past three quarters. The companies, which guarantee mortgages, have been forced to pay off the holders of mortgage-backed securities when homeowners were no longer able to make their loan payments. The pair have also had to write off the value of mortgages they hold on their own books as housing prices fell.

Wall Street's fears about the companies were magnified by the jumpiness of the markets in general, especially about financial stocks being battered by a worldwide credit shortage.

The worries came to a head July 7, when the investment bank Lehman Brothers reported that a proposed change in accounting rules might force Fannie Mae to raise $46 billion in capital and that Freddie Mac might have to add $29 billion. The companies' stock was pummeled. Three days later, William Poole, a former president of the St. Louis branch of the Federal Reserve, publicly called the companies "insolvent" and said the housing markets' woes increased chances that the United States would have to bail them out.


CONTINUED     1           >

© 2008 The Washington Post Company

Network News

X My Profile
View More Activity