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Fannie, Freddie Slip After Key Gains
Treasury Secretary Henry Paulson Jr. and officials are weighing factors in determining whether to intervene.
(By Brendan Smialowski -- Bloomberg News)
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"What you're seeing with Fannie and Freddie is part and parcel of the general aversion to risk on the part of fixed income investors," said Howard Shapiro, an analyst at Fox-Pitt Kelton.
September brings important tests, including persisting questions about whether Freddie Mac can or will raise new capital to offset losses as the company promised its federal regulator months ago. Freddie Mac has said it intends to raise $5.5 billion.
Freddie Mac must also raise money to stay above a capital requirement its regulator sets and could be looking to build in a larger cushion. Freddie Mac has declined to provide a public timeline for raising this capital. Company officials have said they would like to find investors to provide capital but cannot afford the high dividends they would demand. If Freddie Mac doesn't raise the capital, the government may step in.
"It will mean that the likelihood of its needing government help would go up so much more," said Frederick Cannon, an analyst at Keefe Bruyette & Woods.
Fannie Mae says it doesn't need to raise anymore capital at present.
Some analysts disagree. In a report earlier this month, Friedman, Billings, Ramsey Group analyst Paul J. Miller wrote that Fannie Mae likely needs to raise $5 billion to $10 billion to offset growing losses.
"We believe credit losses will not peak until late 2009/early 2010, which should result in elevated provisioning," Miller wrote.
Fannie Mae acknowledges it faces ongoing difficulties. "Significant challenges remain ahead for the company as we manage through the worst housing market downturn in a generation," spokesman Brian Faith said by e-mail. "While periods of speculation and uncertainty will certainly come and go in the days ahead, the company and its management are completely focused on managing our capital position, tackling credit losses and providing liquidity and stability to the markets."
A potentially more serious challenge concerns whether the companies will continue to enjoy access to the debt markets at affordable rates.
The companies issue and pay back hundreds of billions of dollars in debt each quarter, which is used to buy mortgage-backed securities for their portfolios. The companies make money by paying less for the debt than the returns they make on the securities.
Analyst attention has focused recently on whether the companies will be able to roll over about $223 billion in debt by the end of September.
Ajay Rajadhyaksha, head of U.S. fixed income strategy at Barclays Capital, said the uncertainty surrounding the companies could lead them to pay even more for debt.
