US Treasury Secretary Henry Paulson is insisting that if Fannie Mae and Freddie Mac need rescuing, the plan should not benefit the mortgage finance firms' shareholders, the Wall Street Journal said on Saturday.
Citing people familiar with the matter, the newspaper said a possible intervention by the Bush administration to help the government-sponsored mortgage enterprises could happen as early as Monday morning. That is around the time Freddie Mac is due to sell $3 billion of short-term debt, in a barometer of market appetite for its securities.
A Treasury Department spokesman called the article "thinly sourced speculation" but declined to elaborate. Paulson indicated on Friday the administration has no plans to nationalise the congressionally chartered but privately owned companies.
Shares of the two companies that play a central role in US housing markets, currently trading at a small fraction of their value from a year ago, fell sharply this week as fears mounted the two would not have enough capital to make it through the worst US housing crisis since the Great Depression.
The companies on Friday said their finances were sound enough to withstand the housing crisis, and government officials scrambled to make public statements to restore confidence in them.
The abrupt erosion of the share values of the companies, which finance nearly half of US homes, raised the specter of another government rescue operation similar to the sale in March of failing investment bank Bear Stearns.
Paulson does not want to help Fannie Mae and Freddie Mac shareholders because it would create "moral hazard" - encouraging greater risk-taking because of an expectation of a government safety net, the Wall Street Journal reported. Paulson took a similar stance during the Bear Stearns intervention, arguing the government's role in facilitating the firm's sale was needed to prevent broader economic carnage, but that its shareholders should be hit financially.
APPETITE FOR DEBT? The New York Times and the Wall Street Journal reported earlier this week that the government has discussed plans to deal with the failure of either company, including a government take-over. Appetite for Freddie Mac's debt due to be sold on Monday could be a critical indicator of investor confidence next week.
"The deal will do okay because it's pretty clear the debt will be good," said Andrew Harding, head of taxable fixed income at Allegiant Asset Management in Cleveland. "The probability of government intervention is very, very high," he added.
Russia, a holder of about $100 billion in US agency debt, including securities of Fannie Mae and Freddie Mac, said on Saturday it was happy to hold the debt and had no immediate plans to reallocate. Paulson indicated on Friday a bailout of the companies was unlikely despite financial market concerns that the agencies may have trouble raising enough money to keep buying mortgages.
He said the administration's main focus was supporting Fannie and Freddie "in their current form as they carry out their important mission." Senator Chris Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, at a news conference on Friday said the Fed was considering allowing Fannie and Freddie to borrow directly from the central bank.
The anxiety surrounding the health of the financial system was heightened all the more late on Friday when US banking regulators swooped in to take over mortgage lender IndyMac Bancorp Inc, marking one of the largest bank failures in US history and the fifth bank to close this year.
Freddie Mac said it had options to manage capital, such as cutting its dividend, and was not on the threshold of conservatorship. Fannie said it had access to "ample sources of liquidity," noting that it had issued more than $24 billion in debt this week.Another option may be for the government to buy a large bloc of the government-sponsored enterprises' preferred stock. The companies have sold about $20 billion of preferred shares since last fall. Shares of preferred stock have fallen dramatically in recent weeks.
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