Government Control Blunts Impact Of Fannie's Losses In Mkts
27 Februar 2009 - 10:37PM
Dow Jones News
Debt investors barely blinked Friday at Fannie Mae's (FNM)
announcements that its 2008 loss was nearly $60 billion and that
expects to see more red ink this year.
The larger-than-expected loss wipes out 17 years of profit and
may be the death knell to any hopes that the mortgage-finance
company will emerge from government control any time soon.
Risk premiums on mortgage bonds guaranteed by Fannie and its
sibling Freddie Mac (FNM), which is also expected to post steep
losses, held in the same 190-basis-point range during the day, as
they have all week.
This stands in stark contrast to the volatility injected into
the stock and bond market after Citigroup Inc. (C) Friday took
steps to convert preferred shares - including those held by the
U.S. government - into common equity as it seeks to shore up its
capital. The reason is agency-debt investors take comfort in the
fact that Fannie and Freddie are firmly in the government's hands
and that they have a significant role in its initiatives to
stablize housing. Stock investors, meanwhile, have been sidelined
since the government took over Fannie and Freddie last year. Their
stock trades around 43 cents on the dollar.
"Investors, in general, view Fannie and Freddie as firmly under
government control and expect that if any capital needs arise, the
government will take care of it," said Mahesh Swaminathan, mortgage
strategist with Credit Suisse. "Nobody expects Fannie/Freddie to be
full-fledged private companies any time soon," he said.
Fannie and Freddie were placed in conservatorship in
September.
The U.S. Treasury's extension and expansion of its line of
preferred equity credit to $200 billion from $100 billion last week
is viewed as further evidence of the government's support.
Fannie said it expects to tap into these funds in the coming
quarters as "market conditions that contributed to our net loss for
each quarter of 2008 to continue and possibly worsen in 2009, which
is likely to cause further reductions in our net worth."
The perception of stronger government ties also is a big reason
why the housing agencies have had little difficulty raising funds.
Investors queued up this week to buy Fannie's record $15 billion
debt offering.
This puts a heavy burden on the Obama administration to make
good these market expectations. The government remains reluctant to
completely take over the companies.
"But the burden nationalizing the two companies would put on the
national debt, and the ultimate direction of rates make it a tough
option," said Gary Greenberg, a senior vice president and mortgage
strategist at Payden & Rygel, a Los Angeles-based investor in
agency mortgage-backed securities.
The administration did not follow the Congressional Budget
Office's suggestion that the two enterprises be added to the
current federal budget.
If anything, the government bought more time to resolve these
issues by pushing the deadline by which Fannie and Freddie should
start shrinking their portfolios to 2010, Swaminathan of Credit
Suisse said.
"There is the possibility that if these companies get to
manageable sizes and are no longer too big to fail, then they may
not wind up nationalizing them," Greenberg said.
-By Prabha Natarajan, Dow Jones Newswires, 201-938-5071; prabha.natarajan@dowjones.com