Bailouts hinge on rollover of debts
Posted on Thursday, August 21, 2008
URL: http://www.nwanews.com/adg/Business/234923/
Fannie Mae and Freddie Mac’s success in repaying $ 223 billion of bonds due by the end of the quarter stands to be the determining factor in whether they avoid a federal bailout.
Fannie Mae slumped as much as 20 percent to the lowest since 1989, and Freddie Mac dropped as much as 32 percent in New York Stock Exchange composite trading Wednesday, indicating that shareholders view a rescue as increasingly likely. Fannie Mae, based in Washington, has about $ 120 billion of debt maturing through Sept. 30, while McLean, Va.-based Freddie Mac has $ 103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg.
Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital into Fannie Mae and Freddie Mac in an emergency. Freddie Mac paid its highest yields on record in a debt sale Tuesday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.
Rolling over the debt “is the single most important factor to their ability to remain liquid,” said Moshe Orenbuch, an analyst at Credit Suisse in New York. “So far, they’ve been able to do that.”
Investors in Asia, the biggest foreign owner of Fannie Mae’s $ 3 trillion of bonds, are reducing their share of purchases, potentially increasing the need for Paulson to make good on his pledge to backstop the companies.
“This whole backstop mechanism was set up so the actual need for it could be avoided,” said Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York. “The market is testing the Treasury’s resolve.”
Fannie Mae, the Federal National Mortgage Association, is the government-formed corporation established in 1938 to purchase government-backed and conventional mortgages from lenders and securitize them.
Freddie Mac, the Federal Home Loan Mortgage Corp., was created by Congress in 1970. Like Fannie Mae, it also purchases mortgages, pools them and sells them as securities to investors. Both are government-sponsored enterprises and are stockholder-owned companies.
The two companies hold or guarantee more than $ 5 trillion in mortgages — almost half of the nation’s total.
The companies need as much as $ 15 billion each in fresh capital to reserve against losses on mortgages and related securities that they either own or guarantee, Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Va., said.
The Treasury will probably be forced to buy as much as $ 30 billion of preferred shares in Fannie Mae and Freddie Mac by the end of next month, according to Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co.
Freddie Mac “continues to have strong access to the debt markets at attractive spreads,” spokesman Sharon McHale said. Fannie spokesman Brian Faith declined to comment.
“Treasury is monitoring market developments vigilantly. We are focused on encouraging market stability, mortgage availability, and protecting the taxpayers ’ interests,” Treasury spokesman Jennifer Zuccarelli said.
Freddie Mac executives were scheduled to meet with Treasury officials Wednesday, The Wall Street Journal reported, without saying where it obtained the information. The two sides may explore whether the Treasury could clarify its intentions in a way that would reassure investors, the paper said. Zuccarelli told Bloomberg News that the department won’t confirm particular meetings and that they receive regular updates from the companies.
Richmond, Va., Federal Reserve Bank President Jeffrey Lacker became the first Fed official to clash publicly with the Bush administration’s strategy Tuesday, saying the companies should be “credibly and demonstrably privatized.”
“I think a path like what Chairman Greenspan suggested is probably the best path,” Lacker said in a Bloomberg Television interview in Washington. Former Fed chief Alan Greenspan has advocated nationalizing the two largest U. S. mortgage financiers, splitting them up and selling them off.
Freddie Mac on Tuesday sold $ 3 billion of five-year reference notes at its highest yields over benchmarks in at least 10 years as demand fell from Asian investors and central banks. The debt priced to yield 4. 172 percent, or 113 basis points more than U. S. Treasuries of similar maturity. The company sold five-year notes in May at a spread of 69 basis points. A basis point is 0. 01 percentage point.
In market trading, investors this week demanded an extra 104 basis points in yield to own Freddie Mac’s five-year debt rather than Treasuries of similar maturity, the most since reaching a 10-year high of 114 basis points in March. The gap narrowed to 74 basis points after Paulson’s announcement.
Fannie Mae spreads approached a 10-year high of 104 basis points on Monday, from 74 basis points on July 28. In the decade before 2008, the spread averaged 43 basis points.
Fannie Mae paid a record high yield in a $ 3. 5 billion sale of threeyear benchmark notes last week that drew less demand from Asia. Investors in the region bought 22 percent of the offering, almost half the demand of three months ago and about two-thirds of Asia’s usual purchases. Information in this article was contributed by Theresa Barraclough of Bloomberg News.