Paulson fails to slow Fannie-Freddie slide
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News item from the AP this morning (since updated with an L.A. Times story): ‘Treasury Secretary Henry Paulson sought for the second straight day to calm investors panicked about the financial state of Fannie Mae and Freddie Mac, saying the agency aims to keep the mortgage finance companies ‘in their current form’ without a government takeover.’
His attempt to calm investors was not particularly successful: At 10:15 L.A. time, Fannie Mae shares were down $4.05, or 31%; Freddie Mac shares were off $2.01, or 25%. Those are the declines this morning. Fannie lost nearly a third of its value today. (Update: At 11:20 a.m., both stocks had recovered some of their losses; Fannie was down 22% for the day and Freddie 9%).
In a note to clients today, Goldman Sachs puts the Fannie-Freddie crisis of confidence in pretty good perspective. The issue, Goldman says, it not how the government figures out a way to keep these two companies alive. The issue is how does the government figure out a way to make them bigger, and in a hurry. That’s because, Goldman writes, the U.S. economy desperately needs Fannie and Freddie out there buying mortgages; otherwise, the economy is in even deeper trouble than is now obvious.
From the Goldman note: ‘The key significance of Fannie Mae and Freddie Mac in the current economic climate is their ability to soften the impact of the credit crunch. Of the almost $25 trillion of lending capacity to the nonfinancial private sector, roughly half -- on-balance-sheet lending by banks and quasi-banks plus private-label securitization -- is either stagnant or shrinking at present. This means that the other half -- of which the $5.3 trillion Fannie/Freddie book of business is the biggest component -- needs to grow rapidly to generate at least some credit growth over time.’
More: ‘In this environment, the federal government will not only need to stand behind the GSEs but will need to encourage them to continue growing their book of business. Should the market turmoil continue, the administration is therefore likely to continue escalating its signals of support, first with verbal measures -- beyond Treasury Secretary Paulson’s brief statement this morning -- and proceeding to outright credit support if needed.’
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Photo: U.S. Treasury Secretary Henry Paulson, left, looks on as President Bush talks to the media after a meeting with members of his economic team at the Department of Energy in Washington today.
Credit: AFP/Getty Images