Lingering cash surpluses at the ailing mortgage giants are leading some to say they could lose more before needing to be bailed out, which is apparently what the government, hoping to avoid another high-profile rescue, wants.
BusinessWeek: As of early August, both Fannie’s and Freddie’s capital holdings were above their mandatory levels, with Freddie possessing a capital requirement surplus of $2.7 billion and Fannie holding $9.4 billion in additional cash. Credit research outfit CreditSights estimates that Fannie and Freddie could lose $17.3 billion and $8 billion, respectively, before breaching government-mandated capital levels. Meanwhile, both continue to be able to service their debt at a reasonable, if historically high, interest rate about 30 basis points below the London interbank offered rate.
Paulson is probably just hoping the status quo holds for a while longer. When he argued in favour of Treasury’s increased power over Fannie and Freddie in July, Paulson claimed that just having the ability to act would prevent him from needing to. The Bush Administration is hoping to steer clear of another high-profile bailout after the Bear Stearns mess, and if Fannie’s and Freddie’s capital positions hold up reasonably well, Treasury could wait for the GSEs to burn through their cash before making any moves. The “key players would likely prefer to delay action until after the November elections if possible,” Richard Hofmann, an analyst at CreditSights, wrote in a recent research report.
Treasury, however, may not have the luxury of time. While Fannie was able to raise $7.4 billion during the second quarter, Freddie held off on seeking the $5.5 billion it announced it would raise. With its stock at 3.16 and speculation high that a bailout is inevitable, it may be difficult to coax additional capital into Freddie’s coffers, either with common stock or preferred shares. Without the cash, Freddie could breach its mandatory surplus threshold in the third quarter of this year.
Business Insider Emails & Alerts
Site highlights each day to your inbox.