Susan Walsh/AP
Treasury Secretary Henry Paulson, left, accompanied by Federal Reserve Board Chairman
Ben Bernanke

Fannie and Freddie’s Day of Reckoning, Long Foreseen By Many, May Be Near

July 15, 2008 02:07 PM
by Anne Szustek
Treasury Secretary Henry Paulson announced a plan Sunday to rescue Fannie Mae and Freddie Mac from a potential financial calamity that many have warned of for years.

30-Second Summary

In a rare weekend appearance, Treasury Secretary Henry Paulson announced Sunday night that he was asking Congress for speedy approval of authority for the federal government to provide financial support to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).

The announcement came soon before the opening trading bell in East Asian securities markets and on the eve of a $3 billion auction of Freddie Mac short-term securities.

Last week, rumors about the two companies’ insolvency cut the value of their shares nearly in half, prompting the government to take action. Fannie and Freddie are among the few major mortgage lenders left standing after the sub-prime crisis of the past two years, making their sustainability all the more important.

Many critics have been looking askance at the two entities for some time, however. In late September 2004, the Office of Federal Housing Enterprise Oversight filed a report on Fannie Mae alleging accounting discrepancies.

Further, critics have long viewed the companies’ large debt loads as reckless. One banking consultant told NPR’s “Morning Edition” July 14 that, “As of March 31, the two companies combined had over $500 billion of short-term debt outstanding.”

As government-sponsored entities (GSEs), the two companies have enjoyed an implied federal guarantee of their obligations, and thus investors have allowed the GSEs to carry far more debt than would be allowed by an entity without the implicit federal guarantee.

Yet critics claim that the only reason for the two companies to carry such a large risk is to maximize profits for stockholders and executives, while placing taxpayers at risk for a potential bailout. That day of reckoning may finally be nearing.

See AP coverage

Headline Link: ‘U.S. Plan to Save Fannie and Freddie’

Audio: ‘Feds Move to Reassure Fannie, Freddie Investors’

Background: The decline of the two state-sponsored mortgage lenders

Opinion & Analysis: A long time coming


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