Freddie Mac's Next Hurdle: Raise Cash

Treasury Working to Make Sure Debt Sale Succeeds

Unlike the situation facing Bear Stearns earlier this year, Fannie Mae and Freddie Mac are not short of cash.
Unlike the situation facing Bear Stearns earlier this year, Fannie Mae and Freddie Mac are not short of cash. (By Chris Hondros -- Getty Images)
Washington Post Staff Writers
Sunday, July 13, 2008; Page A01

Treasury Department officials were working the telephones yesterday to make sure that Freddie Mac, one of the nation's two troubled mortgage giants, will be able to sell $3 billion of its securities tomorrow in a previously scheduled sale that has now become a crucial test of investor confidence.

Though officials said they were optimistic the sale would be a success, anything less would pose new questions about how far the federal government is willing to go to prop up Freddie Mac, its sister Fannie Mae and other faltering financial enterprises.

Officials spoke yesterday with major banks that normally purchase securities, like the short-term debt offered by Freddie, to ensure these firms still plan to place bids tomorrow. This was part of an effort by officials at Treasury, the Federal Reserve and other agencies this weekend to gauge market sentiment and check that investors still have faith in Freddie Mac and Fannie Mae after the steep decline in their stock prices last week.

At the same time, Treasury officials were considering several options to backstop the sale in case they discover that interest in the securities is flagging, according to sources familiar with the discussions. Under one alternative, the Treasury or Fed would purchase the securities directly.

Other possibilities are allowing the Federal Reserve Bank of New York to buy the debt indirectly through private brokers or asking private firms to purchase the debt while extending to them either a public or private assurance that the government would back the securities if Freddie were ultimately unable to cover its obligations.

As the credit crisis has battered one financial giant after another, federal officials have taken steps that have put the government, and potentially taxpayers, on the line behind private institutions.

Last week's gut-wrenching ride for shareholders of Fannie Mae and Freddie Mac raised speculation about whether the Bush administration might be forced to step up again, either by taking direct control of the firms or by pumping fresh capital into them, perhaps in return for stock and a promise to restructure the companies.

It would be only the latest in a series of unusual interventions. In March, the Fed extended a $30 billion credit line to orchestrate JP Morgan Chase's purchase of troubled investment bank Bear Stearns. The Fed then let other investment banks borrow directly from the Fed at favorable rates. And Friday the Federal Deposit Insurance Corp. seized control of California-based IndyMac Bank with plans to liquidate its assets at a cost that could wipe out more than 10 percent of the FDIC's funds.

"Someday this capitalistic economy, or what we used to call the capitalistic system, needs to get back on track and that means failure," said Lee Hoskins, former president of the Federal Reserve Bank of Cleveland. "You can't have risk-taking without failure."

But if there is a limit to the government's willingness to back financial giants, now might not be the best time to find out.

Even long-time critics of Fannie Mae and Freddie Mac -- unusual hybrids with private shareholders, a public mission, a congressional charter and implied government backing -- say that the federal government has no option but to assure their viability because they are so central to already troubled mortgage and housing markets and hence to the overall economy.

The $5.2 trillion in mortgages owned or guaranteed by Fannie Mae and Freddie Mac dwarfs the size of the savings and loan institutions taken over by the federal government in the late 1980s or even the big Japanese banks that required government assistance there in the 1990s. These have been two of the biggest post-Depression financial rescue efforts.

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