As the crisis worsens for mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson is insisting that any potential government rescue plan not benefit the companies’ shareholders, according to people familiar with the matter…
As with Bear Stearns, Paulson is concerned about “moral hazard.” After the bashing he took for bailout Wall Street fat cats for allowing Bear to be sold for $10, moreover, he’s probably also concerned about Paulson hazard.
And how, exactly, would the government save the firms? Paulson sources say he’s still committed to keeping the companies in their current form (i.e., not nationalizing them). This leaves a few options:
How any rescue might be orchestrated remains unclear…One option would have the government buy a chunk of Fannie and Freddie’s preferred stock with terms that dilute the equity of common shareholders. The Federal Reserve could support Fannie Mae or Freddie Mac in a short-term funding crisis through its lending operations, which were extended to investment banks in March with the downfall of Bear Stearns Cos. A spokeswoman said Friday the Fed hasn’t discussed that possibility with either company.
As for the companies themselves, they continue to insist that they are in great shape, even as their stocks plummet further by the day. But Monday could change that:
[T[he next big test will come Monday when Freddie Mac is due to sell $3 billion of short-term debt. An unsuccessful sale could be a major blow to investor confidence. If the administration were to intervene, it could do so before markets opened that day, according to a person familiar with the deliberations.