Aid to Fannie, Freddie May Top Expectations

By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, November 14, 2008

The first of the Bush administration's major financial takeovers, the seizure of Fannie Mae and Freddie Mac, is poised to get more expensive and some analysts are warning that it may ultimately cost more than the government has suggested.

Mounting troubles in the financial and housing markets have further undermined the health of the companies in the months since the government seized them in September, making it likely the Treasury will be required to pump billions of dollars into the mortgage-finance giants.

Though not a cent has been spent, some analysts are warning the tab could exceed the $200 billion that the government set aside for capital infusions into the two companies.

The first cash injection could come as soon as today, when Freddie Mac is required to report its quarterly earnings.

The prospect of growing assistance underscores how the government is being sucked ever deeper into supporting financial firms with taxpayer money as the worsening financial crisis continues to erode companies that federal officials have vowed are too important to fail.

Under the government's agreement with the companies, the Treasury is required to inject money in any quarter when the companies' liabilities exceed their assets, up to $100 billion for each firm.

When the Treasury seized the firms, it said it had chosen the figures primarily to reassure investors who had been fleeing the companies. "This number is unrelated to the Treasury's analysis of the current financial conditions," the Treasury said at the time, suggesting that there was no expectation the government would spend this amount.

Since then, the financial crisis has deepened, making it even more difficult for the companies to finance their debt, and the economy has been shrinking, stifling the ability of borrowers to make payments on mortgages that are at the heart of the firms' business.

"Depending on what happens with housing, you could see scenarios where the $100 billion comes into the question," said Rajiv Setia, an analyst with Barclays Capital. He said McLean-based Freddie Mac may need $40 billion by the end of the year.

On Monday, District-based Fannie Mae reported a whopping $29 billion loss, bringing it close to triggering a government cash injection. Most of that loss was because the company wrote down the value of tax credits it is unlikely to use.

"If we continue to experience substantial losses in future periods or to the extent that we experience a liquidity crisis that prevents us from accessing the unsecured debt markets," Fannie Mae said in a regulatory filing this week. "This commitment may not be sufficient to keep us in solvent condition."

Many analysts consider Freddie Mac to be in worse financial shape and, if it makes the same decision as Fannie Mae regarding tax credits, would report today that it owes billions more in obligations than it has in assets, triggering a government injection of cash.

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