Fannie Mae and Freddie Mac: A Damage Report

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Reason for Hope

Michael Wallace, global market strategist at Action Economics, says some of the subordinate debt holders still have reason for hope that Fannie and Freddie can successfully recapitalize on their own. If the government intervenes, though, "it's anybody's guess what anything will be worth."

Despite the increased chatter about an impending bailout, most analysts see no pressing need for one as long as the GSEs hold ample amounts of excess capital on their balance sheets. As of last week, Fannie's excess core capital—above the amount required by regulators—was $9.4 billion and Freddie's was $2.7 billion. And with $10 billion in mortgage paydowns a month, each company would be able to free up $1 billion of core capital every quarter if they opted not to reinvest these paydowns, according to a Citigroup report published Aug. 21. A point of further irony: Despite mounting foreclosures, Fannie's and Freddie's profitability has been improving lately with margins between their assets and their borrowing costs the widest they've been in many years, Citigroup said.

Larkin says it is highly unlikely the Bush Administration will do anything to damage the private-enterprise component of the GSEs.

"Political Football"

"The last thing [they] want to do is create another giant division of the U.S. government. That's why things are quiet now. This is a political football," he says. In addition, if the government makes a move that ends up harming the agencies, the Administration wold be chastised for making home mortgages less affordable.

Wallace at Action Economics disagrees. He believes Republicans don't like the quasi-governmental structure of Fannie and Freddie, which doesn't jibe with their view of free markets, and says if the government does take them over, it could just as easily dispose of them, change their mandates, or sell off their assets.

All told, the damage to the agencies' equity and debt investors is hard to quantify, but it will certainly run in the hundreds of billions of dollars. Dan Seiver, a finance professor at San Diego State University, provides one final bit of perspective: However much stock and bond investors stand to lose in the end, it will probably be dwarfed by the total wealth that American homeowners have seen evaporate since the credit crisis started—an amount he estimates will be in the trillions.

Business Exchange related topics:
Fannie Mae and Freddie Mac
Mortgage Crisis
Credit Crunch
Bailout
Housing Market

Bogoslaw is a reporter for BusinessWeek's Investing channel.