Fannie, AIG Struggling After Federal Takeover
Tuesday, November 11, 2008
Two months after the government began taking over ailing financial companies, the two largest efforts have failed to go as planned, with the firms complaining that federal officials set overly strict terms and took other unhelpful rescue measures.
Fannie Mae yesterday reported a $29 billion loss for the three months ended Sept. 30 and warned that the mission it was given by the government, to help revive the mortgage market, could be compromised unless the Treasury Department takes new steps to support the company. Fannie Mae chief executive Herbert M. Allison has approached the Treasury about providing more help, but Treasury Secretary Henry M. Paulson Jr. has demurred, according to three sources familiar with the discussions.
The insurance giant American International Group, meanwhile, reported a $24.5 billion quarterly loss yesterday as the government agreed to offer it a more generous lifeline in the form of a new, $152 billion loan on easier terms. The government extended an $85 billion loan to AIG in September followed by $38 billion more in October, but the company has been eating away at it at an accelerating pace.
The struggles of these two largely nationalized companies underscore the government's difficulty in intervening in private markets in a way that both protects taxpayers and ensures that the rescue efforts succeed. The government's experience in addressing the financial troubles at Fannie Mae and AIG offers a cautionary tale at a time when Washington is debating whether to extend the federal umbrella to Detroit automakers and other beleaguered firms. Before September, it had been a generation since the government took over a private company out of concern that its failure could endanger the U.S. economy.
At both Fannie Mae and AIG, the reported losses largely reflected poor decisions by the companies before the government intervened.
But the willingness of the government to revise the rescue package for AIG and not, so far, for Fannie Mae reflects what's happened since. AIG has continued to hemorrhage despite the government's involvement. Fannie Mae has not. But while the government takeover has largely stabilized Fannie Mae, the federal actions have made it difficult for the company to expand its purchases of home loans, in turn undercutting its mission to boost the mortgage market.
The government took a controlling stake in both AIG and Fannie Mae, along with Freddie Mac, when the Treasury bailed them out and imposed stiff terms on the help, sending a signal to the market that the Treasury would intervene only at a big cost to shareholders.
In AIG's case, those terms, including relatively high interest rates, proved too tight as the company experienced far greater losses than the government had anticipated. To make interest payments on the loan, AIG had to borrow more money from other government sources, and the company's finances risked spiraling out of control. The plan announced yesterday expands the current AIG program to $152 billion. It also restructures it to make it easier for AIG to repay taxpayers and provides $40 billion in direct government investment.
In Fannie Mae's case, the government offered in September to extend loans and make direct investments in the District-based company to allay concerns that it would collapse. But the conditions attached to those potential sources of capital made it difficult for Fannie Mae to tap them, in turn limiting its ability to pump money into the mortgage market.
Yesterday, Fannie Mae went public with its concerns about this federal assistance. It warned that it "may prove insufficient" to allow the company to routinely pay off its loans or "continue to fulfill our mission of providing liquidity to the mortgage market at appropriate levels."
Fannie Mae's reported loss of $29 billion, or $13 a share, was the single biggest loss for any U.S. company this year. It compared with a loss of $1.4 billion, or $1.56 a share, in the third quarter of 2007. More than two thirds of the loss resulted from writing down the value of deferred tax assets, which are credits that can be applied against income taxes.
The company added that its difficulties had been further compounded by government actions after the takeover that made the task of supporting the housing market even tougher.