By Zachary A. Goldfarb
Washington Post Staff Writer
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.
In October, the government announced a series of steps to protect loans made to banks and big corporations. These loans to private banks, the company reported, may have become "more attractive investments" than loans to Fannie Mae, historically one of the safest investments. Although investors have long assumed that the government stands behind Fannie Mae, this guarantee is no longer as strong as those now explicitly provided to some other financial companies.
Fannie Mae uses loans to buy up mortgages and mortgage bonds. "The U.S. government does not guarantee, directly or indirectly, our securities or other obligations," the company said.
As the financial markets took a sharp turn for the worse in October, the government introduced a variety of protections for financial institutions. The Treasury Department, Fannie Mae and its regulator, the Federal Housing Finance Agency, initiated a series of discussions about what else the government could do to support the mortgage market.
Fannie Mae had begun taking steps to make home loans more affordable, such as buying more mortgage bonds to put money into the market and eliminating fees it charged to insure loans. But the company was having trouble raising affordable, long-term funding in the debt markets -- the money it uses to buy mortgages. As a result, mortgage rates were rising. That was the opposite of what government officials intended when they took over Fannie Mae and Freddie Mac.
The government could provide more support for Fannie Mae by buying the company's debt or making it easier for the company to get loans or capital directly from the Treasury.
But Paulson wasn't interested in renegotiating the terms of the department's agreement with Fannie Mae, according to sources who spoke on condition of anonymity because they were not authorized to disclose the discussions.
"We have occasional discussions with [Fannie Mae and Freddie Mac] and FHFA as we monitor the mortgage market and look to address the housing correction," said Treasury spokeswoman Michele Davis. "We have received no recommendations from Fannie Mae."
Peter J. Wallison, a former Treasury official and a fellow at the American Enterprise Institute, said the government was being foolhardy in failing to do more for Fannie Mae. "What is the reluctance on the part of Treasury to put money into Fannie and Freddie? We know they're going to lose money. So what?" he said. "Their objective is to help the housing market."
Some financial experts have suggested that the government go even further and fully nationalize firms like Fannie Mae and Freddie Mac, allowing them to borrow at the same low rates the U.S. government can.
In contrast to Fannie Mae, AIG won a new relief package after the initial bailout aggravated the company's difficulties.
AIG, which has recorded $43 billion in losses on home mortgages, was facing bankruptcy in September when the government stepped in. To raise capital to pay back the government's initial loan, the chief executive appointed by the Treasury, Edward M. Liddy, planned to sell off some AIG subsidiaries, such as life insurance and airplane-leasing firms.
But the falling stock market made that difficult by depressing the value of the company's shares. Meanwhile, the freeze in credit markets made it even harder for AIG to remain liquid and pay off debts. AIG was forced to put up billions of dollars to cover derivatives it had sold to investors.
"It was obvious to me from Day One that the terms of that arrangement were really quite punitive in terms of the interest rate and the commitment fee and the shortness of it," Liddy said in a Bloomberg Television interview yesterday. "I started really about a week after I got here trying to renegotiate."
Under the new plan, the government will inject $40 billion into AIG, a move similar to what it has done with U.S. banks. In addition, the government will help unload $52.5 billion in troubled assets on AIG's books while reducing the amount of the original loan and cutting its interest rate.
"In September, when AIG had to be rescued, we did not have authority to purchase equity," said Davis, the Treasury spokeswoman. If the Treasury's financial bailout program had already been created, she added, "we would have purchased equity at that time."