Morgan Stanley Tapped To Assess Fannie, Freddie

By Jeffrey H. Birnbaum and David Cho
Washington Post Staff Writers
Friday, August 15, 2008

The Treasury Department tapped investment bank Morgan Stanley to assess how vulnerable the troubled mortgage giants Fannie Mae and Freddie Mac are to further economic stresses and how much capital they would need to weather them, according to documents released yesterday.

One of Morgan Stanley's primary tasks is to project likely credit losses at the companies given different assumptions about the performance of the housing market. Fannie Mae and Freddie Mac have already been buffeted by the soaring rates of defaults and foreclosures.

The bankers will examine whether the firms are accurately judging their financial strength and what steps the Treasury might have to take to rescue them in an emergency, people familiar with the contract said. The people spoke on condition of anonymity because they said it would be inappropriate to discuss contract matters.

Last month, the Treasury won new powers to lend the companies money or buy their stock to keep them from going under. Fannie Mae and Freddie Mac, which own or guarantee half the nation's mortgages, are vital to the health of the nation's housing market.

Morgan Stanley is part of a team of elite experts from Wall Street assembled in recent weeks by the Treasury to address the spreading financial turmoil. The group includes Ken Wilson, an influential investment banker who retired from Goldman Sachs to become the Treasury's point person in dealing with crises in the financial markets. W. Scott Frame, an expert on Fannie Mae and Freddie Mac, has been detailed from the Federal Reserve's Atlanta branch to supplement the Treasury's analysts.

The hiring of a prominent Wall Street firm for such a mission is unusual and underscores how seriously Treasury Secretary Henry M. Paulson Jr. is taking the possibility that the Treasury might have to provide assistance to Fannie Mae and Freddie Mac. Paulson has repeatedly said that he did not expect to use the Treasury's emergency powers to keep the mortgage firms afloat.

Paulson asked John J. Mack, the chief executive of Morgan Stanley, to bid for the contract soon after the Treasury obtained authority from Congress to lend or invest in the mortgage firms to prevent a meltdown of the companies, according to people close to the engagement.

Morgan Stanley delivered a PowerPoint presentation on July 28 about its capabilities in analyzing complex transactions, especially those that involve mortgage-backed securities of the kind Fannie Mae and Freddie Mac deal in.

The Treasury signed a contract with the firm Aug. 5, and Mack said Morgan Stanley was "honored" to have been asked to take on the assignment.

Morgan Stanley is not being paid a fee for its work, and the maximum payment for expenses, $95,000, is less than what a first-year investment banker at the firm would make.

Whether it gains other benefits from being allowed a detailed look inside Fannie Mae and Freddie Mac is unclear. Morgan Stanley laid out its potential conflicts of interest to the Treasury in its July proposal, but the Treasury redacted much of that section at Morgan Stanley's request from the documents disclosed yesterday. The contract bans Morgan Stanley from doing business with the mortgage firms until March of next year, two months after its contract expires.

The contract requires Morgan Stanley to receive information "in a secure location with access limited to only those [Morgan Stanley] employees with a 'need to know.' " Asked about the "secure location," a spokeswoman for Morgan Stanley declined to comment. The contract also requires the firm to "dispose of" all information it receives from the Treasury when its assignment concludes.

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