 Bailout bill won't benefit Fannie, Freddie investors
(China Daily)
Updated: 2008-07-30 07:44 Bank of America Corp, JPMorgan Chase and Co, Treasury Secretary Henry Paulson and Pacific Investment Management Co's Bill Gross are winners in the housing-bailout bill Congress passed last week. Losers in the bill include shareholders of Fannie Mae and Freddie Mac, who may see their equity wiped out if the US Treasury uses its new authority to take over the government-sponsored companies. Fannie and Freddie shares have fallen more than 70 percent in New York Stock Exchange composite trading this year. "This legislation has indicated to investors that Fannie and Freddie are not implicitly guaranteed, not explicitly guaranteed, but we're close to that point," said Gross, 64, who oversees the $128 billion Total Return Fund for Newport Beach, California-based Pimco. "We like it." The bill extends a government lifeline to Fannie and Freddie, shoring up public confidence in the two biggest providers of funding for US mortgages and their $5.2 trillion of debt. It creates an independent agency to regulate the companies, launches a Federal Housing Administration program to insure as much as $300 billion in mortgages and provides tax credits to first-time buyers in a bid to reduce a backlog of unsold homes. There was a 10-month supply of new homes for sale in June, according to a UBS AG research note July 25, slightly below the record of 11.2 months in March. Inventories stood at 6.5 months at the end of 2006, UBS said. Speedy passage Congress accelerated action on the housing bill after lawmakers added a plan sought by Paulson, 62, allowing him to back up Fannie and Freddie. The Treasury may now buy shares of the companies, which own or back half of the $12 trillion in US mortgages. The change prompted President George W. Bush, 62, to drop his veto threat. Bush may sign the bill this week. Paulson's need to forge a deal on the legislation outweighed Republicans' aim to restrict the companies' influence in the mortgage market and reversed the Bush administration's position that the government doesn't guarantee their assets. The Treasury chief's efforts contradicted predecessor John Snow's statement that investments in the two mortgage companies are "uninsured" and they aren't too big to fail. Republicans criticized the reversal, saying Paulson was turning his back on the party's free-market adherence. The bill did not go far enough to overhaul the lenders and would leave taxpayers on the hook for "billions and billions of dollars", House Republican Leader John Boehner, 58, said. "I am disappointed that we couldn't do better," Boehner, an Ohio Republican, said on the House floor last week. Right to buy Once Bush signs the bill into law, the Treasury will have the right to buy unlimited stock in Fannie Mae and Freddie Mac, which are known as government-sponsored enterprises. The measures provide a federal backstop for the two companies, letting them borrow at a cheaper rate than private corporations. Unlike past corporate rescues, Congress is not requiring the companies to pay anything up front for the backing, said Joshua Rosner, an analyst with independent research firm Graham Fisher & Co in New York. "Once again, Fannie and Freddie rolled Congress," Rosner, 41, said. "This is maybe the most taxpayer-unfriendly legislation we've seen in the past decade." "The legislation should reinforce confidence that the GSEs will be able to serve the housing-finance system now and in the future," Fannie Mae Chief Executive Officer Daniel Mudd said after the House passed the measure. Freddie Mac didn't comment on the legislative action. The housing bill doesn't automatically give the Treasury preferential treatment over other shareholders if it buys the companies' preferred shares. The government also can't compel Fannie Mae or Freddie Mac to issue securities or purchase common stock. "It sounds like the GSEs got what they wanted again," said Paul Miller, an analyst with Friedman Billings Ramsey & Co in Arlington, Virginia, who rates Fannie and Freddie "underperform". Lawmakers rejected a proposal to bar Fannie Mae and Freddie Mac from paying dividends while they are tapping the Treasury's expanded line of credit. The legislation directs the agency to negotiate financing terms that "take into consideration" whether cutting those payments will protect taxpayers against losses. Agencies (China Daily 07/30/2008 page16) |
