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Bailout skeptics doubt even a new, stronger regulator will succeed in bringing the mortgage giants to heel.

NEW YORK (Fortune) -- Backers of the housing rescue bill have been trying to reassure skeptics in Congress by pointing to the bill's creation of a new world-class regulator for Fannie Mae and Freddie Mac. But opponents doubt any watchdog will have enough teeth to keep the well-connected mortgage guarantors in line.

Indeed, debate in the House ahead of Wednesday's passage of the Housing and Economic Recovery Act of 2008 suggests that even with a stronger regulator in place, the companies' quasi-governmental status - which critics say allow managers and shareholders to reap the fruits of housing booms, while consigning taxpayers to pay for the inevitable missteps - will remain a source of conflict.

The bailout bill, which is expected to be approved by the Senate and signed by President Bush in coming days, gives the government the authority to buy shares in the companies and to lend freely to them in times of market stress. The bill also creates a new, independent agency - the Federal Housing Finance Agency - to replace the mortgage giants' current regulator, the Office of Federal Housing Enterprise Oversight.

Treasury Secretary Henry Paulson has said a tougher regulator would help ensure that Fannie and Freddie avoid making mistakes that would lead to return trips to the taxpayer trough.

Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) were created by Congress to provide funds for the mortgage market. They have historically been able to borrow at below-market rates, as investors assume their obligations will be made good by the government if the companies run into financial trouble. But with house prices plunging after a long run-up, investors now fear mortgage-related losses will wipe out the companies' thin equity cushions.

The legislation gives the new regulator more authority than did its predecessor. The FHFA will be on par with other federal financial regulators in its capacity to set underwriting and capital standards, assess penalties and remove officers and directors, for instance. The companies were widely perceived in the past to be able to make end runs around OHFEO and lobby Congress directly.

A tough crowd to control
It's clear that the promise of more oversight was crucial to getting conservatives' support for the rescue package, which will provide funding to enable 400,000 or more homeowners in trouble with their lenders to avoid foreclosure.

But if the new agency is stronger than OFHEO, it's an open question whether any regulator can control Fannie and Freddie.

For one thing, it's easy to see that overseers from the Fed on down did little in recent years to rein in the financial sector excesses that led in large part to the housing bust. That's among the reasons some skeptics say the companies should be nationalized and made part of the government, while others advocate that Fannie and Freddie be set free altogether.

"Ending the amorphous status of Fannie and Freddie seems highly desirable," Jared Bernstein, a senior economist at the Economic Policy Institute, told Congress in testimony this week. "The fact that they are private on paper but public in the minds of investors is highly distortionary."

Beyond that, there's the issue of how much actual latitude a regulator might have in policing huge companies in a sensitive industry at a time of crisis. With the private mortgage lending industry in near collapse, Paulson and other officials are counting on Fannie and Freddie to keep providing money for the mortgage markets.

Yet skeptics of Fannie and Freddie - which together hold $1.4 trillion of mortgages and guarantee some $3.5 trillion in mortgage-backed securities - say the companies must, at the very least, drastically shrink their mortgage holdings to reduce the risk of future taxpayer bailouts. Judging by the massive selloff in the companies' shares earlier this month before Paulson responded with his bailout plan, investors seem to agree.

Time to get smaller
Rep. Kevin Brady of Texas, for one, believes any congressional action should specify stricter capital standards, along with plans to wind down the companies' mortgage portfolios and replace the top executives at Fannie and Freddie.

"The millionaire captains who grounded this ship have proven they are not the ones to steer us to calmer seas," he said Wednesday in voting against the bill, which passed the House by a 272-152 vote Wednesday.

Others, such as Bernstein, say any taxpayer support of privately owned companies must be accompanied by congressional action that penalizes execs who led their companies into the abyss.

"The taxpayer foots the bill, often taking on the same bad debt that got these bad actors into trouble in the first place," he testified earlier this week. "Yet, too often, the bailout also saves these managers' compensation packages."

The size of those compensation packages came into view last week, when Freddie disclosed that CEO Richard Syron made at least $10 million last year - for his supposedly stellar performance in a year in which the company started recognizing the massive losses that have hammered its shares in 2008.

While no taxpayer dollars have yet been lavished on Fannie and Freddie, merely putting in place rules that could enable the government to buy the companies' shares "changes forever the links between Freddie and Fannie and the government," Cumberland Advisors economist Bob Eisenbeis wrote last week.

Unfortunately for whoever ends up with the job of running the companies' new regulator, much else remains unchanged.

Congressional Budget Office puts possible price tag on Bush administration plan to stabilize mortgage finance giants - says 50% chance money won't be needed.
Last Updated: July 22, 2008: 10:42 AM EDT


NEW YORK (CNNMoney.com) -- The Congressional Budget Office on Tuesday estimated that a government plan to stabilize mortgage giants Fannie Mae and Freddie Mac could cost government coffers an average of $25 billion.

The CBO said it thinks there is probably a better than 50% chance that the Treasury would not need to step in. In addition, it said there is nearly a 5% chance that Freddie and Fannie's losses would cost the government $100 billion.

CBO's $25 billion cost estimate is an average based on "the path of housing prices in the next several months." They considered three scenarios: prices stabilize, grow modestly or decline steeply.

The CBO report came out one day before the House is expected to debate and vote on a rescue plan proposed by Treasury Secretary Henry Paulson last week. Paulson asked Congress to give the Treasury broad, but temporary powers intended to provide a liquidity and capital "backstop" for the two government-sponsored enterprises (GSEs).

Paulson requested that the Treasury be allowed to offer Fannie and Freddie an unlimited line of credit for 18 months and be given authority to buy stock in the companies if necessary.

Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the GSEs could leave taxpayers with a fat bill to pay.

In a speech in New York on Tuesday, Paulson stressed again there are no immediate plans to exercise the powers he seeks and characterized the proposal not simply as a way to support Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) but to support the U.S. capital markets and the economy.

"The best way to protect the taxpayer is to have very flexible powers which are temporary," Paulson said. His reasoning: That's the best way to boost market confidence in the two companies and minimize the likelihood that the government would need to lend a hand.

Even though Paulson wants as much flexibility as possible, lawmakers are expected to impose some parameters, such as giving Congress the right to limit executive pay at Fannie and Freddie and insisting that if government money is used the GSEs agree to pay Uncle Sam before paying investors dividends, or if they're liquidated, assets.

Treasury Secretary says proposal is crucial to restoring confidence in mortgage finance giants Fannie Mae and Freddie Mac.

NEW YORK (CNNMoney.com) -- Treasury Secretary Henry Paulson urged Congress Tuesday to approve the Bush administration's plan to back up mortgage financiers Fannie Mae and Freddie Mac.

Speaking in New York the day before the House is expected to take up the proposal, Paulson said it's crucial for the companies to have access to the necessary capital so they can continue their operations and regain the public's confidence.

"Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions," Paulson said in prepared remarks.

The administration last week unveiled a plan to inject untold billions of dollars into Fannie and Freddie by temporarily increasing their line of credit with Treasury and allowing Paulson's agency to buy stock in the mortgage giants. The secretary has stressed that the two may never need to draw upon the funds, but that the proposal should calm the roiling markets by making it clear the government stands behind the companies.

Paulson also wants Congress to endorse the creation of a new regulator for Fannie and Freddie, which would keep a closer eye on the companies' operations.

Freddie and Fannie are critical to the revival of the United States housing market. The two provide much-needed funding for banks and lenders, who can no longer turn to investors to buy pools of mortgage loans. Freddie has already indicated it might have to reduce its purchases of home loans, which would make it even more difficult and expensive for Americans to obtain mortgages.

Set up by Congress to encourage homeownership but spun off as private companies owned by shareholders, Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) own or guarantee more than $5 trillion in home loans. This is about half the mortgages in the United States.

Paulson's speech comes as Congress is poised to vote on the housing rescue plan. The House is expected to take up the proposal on Wednesday. House Financial Services Chairman Barney Frank, D-Mass., and others have said they are concerned about giving the Treasury department a blank check to bail out Fannie and Freddie.

Tuesday's speech comes a day after Paulson spent time with Wall Street chief executives discussing the current economic situation. He also took a weekend tour of the talk show circuit, appearing on CNN and CBS on Sunday to drum up support for the plan.

Plunge in stock prices of the two mortgage finance giants triggered scrutiny by bank examiners, according to NYT.


July 22, 2008: 7:03 AM EDT


LONDON (CNNMoney.com) -- Bank examiners from the Federal Reserve and the Comptroller of the Currency are scrutinizing the books of U.S. mortgage finance giants Fannie Mae and Freddie Mac, according to a published report.

U.S. Treasury Secretary Henry Paulson told The New York Times Monday that the examiners began inspecting the two companies' books after their plunging stock prices roiled the market.

Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) own or back about $5 trillion of home mortgages. Their stock has plummeted in recent weeks on concerns about the losses they face amid the housing slump.

Paulson unveiled a plan earlier this month that would give the two firms an extended line of credit with the U.S. Treasury. Under the plan, the government would also be able to buy stock in Fannie and Freddie if they aren't able to raise enough capital on their own.

Paulson told the Times he still believes the two firms have enough cash to withstand further declines in the housing market.

Troubled mortgage finance giant may sell as much as $10 billion in new shares, Wall Street Journal reports.

Last Updated: July 18, 2008: 4:45 AM EDT


LONDON (CNNMoney.com) -- Battered U.S. mortgage finance giant Freddie Mac is mulling a plan to raise capital by selling up to $10 billion in new shares, according to a published report.

Freddie's board met Thursday to consider options for selling new shares, the Wall Street Journal reported, citing sources familiar with the matter.

The move could help Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500) avoid a government rescue, the newspaper said.

Freddie would likely sell new shares to existing shareholders, although a plan has not been finalized, according to the report. Any stock sale could also be difficult to pull off, it added.

Shares of Freddie Mac and Fannie Mae - which together own or back about $5 trillion of U.S. home loans - have plunged amid concerns about the two firms' ability to withstand the housing slump.

On Sunday, the Treasury Department and Federal Reserve unveiled a rescue plan that would bolster the two mortgage finance giants, which play crucial role in the U.S. economy.

Freddie Mac CEO Richard Syron told the Journal Freddie's board has been discussing "the full array of options before us," but he did not provide specifics. He also told the newspaper it was too early to say when Freddie would raise capital.

How big a burden taxpayers would bear if Uncle Sam lends a hand to the two mortgage finance giants depends on a lot of hard-to-estimate variables.

NEW YORK (CNNMoney.com) -- Saving Fannie Mae and Freddie Mac could cost the U.S. taxpayer. But so could letting the two mortgage giants collapse.

A rescue plan that uses federal dollars would risk increasing the deficit and possibly lowering the U.S. debt rating, making it more expensive for the government to borrow in the future. A decision not to intervene could lead to deep pain in the mortgage market and the parts of the economy tied to it.

The Bush administration is betting the first option is preferable to the second.

A proposal outlined by Treasury Secretary Henry Paulson - if approved by Congress - would offer explicit backing for the two government-sponsored enterprises (GSEs). It has three main elements.

Increase each company's $2.25 billion line of credit with the Treasury by an unlimited amount for the next 18 months.
Let the Treasury have the option of buying an unlimited amount of Fannie and Freddie stock over the next 18 months.
Give the Federal Reserve a consultative role with the GSEs' regulator to assess the companies' capital requirements.
In any rescue, Treasury would likely have to borrow billions of dollars. Exactly how much it would cost taxpayers is impossible to gauge because of several unknowns. Among them are extreme volatility in the companies' stock prices coupled with falling home values and rising mortgage default rates, which affect the value of the GSEs' assets and debt.

"Stuff's happening to the portfolio that we don't know about," said Lee Sheppard, a contributing editor at Tax Analysts. "It's a fluid situation."

And maybe the biggest unknown: just how much the government might spend on Fannie and Freddie.

"Let me stress there are no immediate plans to access either the proposed liquidity or the proposed capital backstop," Paulson told the Senate Banking Committee on Tuesday.

Paulson said he had a reason for not proposing a cap on the new line of credit or on the amount of GSE stock the Treasury could buy.

"By having something that's unspecified, it will increase confidence and decrease the likelihood that [the liquidity and capital backstops] will ever be used," he said. "If you have a bazooka in your pocket and people know it, you probably won't have to take it out."

Without specifying how, Paulson added that if and when the government does commit money, "we have to look carefully at ways to protect the taxpayers."

How the chips may fall
A number of senators on the banking committee - from both parties - characterized Paulson's request as asking lawmakers for a "a blank check," and they were none too keen on the idea, knowing they have to answer to taxpayers.

How lawmakers might alter the Treasury's proposals isn't clear yet. But if the government uses federal dollars to help Fannie and Freddie, the cost to taxpayers could be minimal if the rescue plan works. That is, if government efforts bolster the companies, they likely would be able to pay back what they owe.

"Taxpayers may get it all back with interest," said Rudolph Penner, a former director of the Congressional Budget Office and currently a senior fellow at the Tax Policy Center.

But the taxpayer cost could increase if Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) default on their debt or if their stocks lose value. This year, they've already fallen over 80%, with the bulk of those losses coming this month.

The costliest rescue potentially would be if the government decides to take over the two companies. Both Paulson and President Bush on Tuesday stressed that they want Fannie and Freddie to remain shareholder-owned companies.

But if a takeover does occur - or even if the government just buys a very large equity stake - taxpayers would effectively take over the debt obligations of Fannie and Freddie.

Currently, the two companies own or back $5 trillion in debt. But the ultimate debt burden to taxpayers would likely be only a small percentage of $5 trillion because that debt is backed by assets with value - homes - and because the majority of the loans they own or back are the more stable 30-year fixed-rate mortgages.

At the end of the day, a taxpayer bill is "nothing to sneeze at - I wouldn't shrug it off," Penner said.

But, he added, it's unlikely the debt from a rescue would come close to some of the government's biggest fiscal burdens, such as Medicare. The amount of general revenue that will be required to pay for Medicare in the next three years alone approaches $600 billion, according to the Concord Coalition, a deficit watchdog group. And that's on top of the premiums and Medicare taxes Americans will pay in to the system.

Other possible costs
Long-term, the potential downside of a Fannie-Freddie intervention could increase taxpayer costs in other ways. One of them: It could help drag down the government's top-notch credit rating.

A report issued this spring by the credit rater Standard & Poor's estimates that if the U.S. economy hits a long recession, government help for the GSEs "could create a material fiscal burden to the government that would lead to downward pressure on its rating."

The danger to the credit rating wouldn't necessarily come just from the Treasury stepping in. Rather, it would result from a confluence of events stemming from problems at the GSEs, such as slowing economic growth and a reluctance among foreigners to buy more U.S. debt, said John Chambers, managing director and chairman of S&P's sovereign rating committee.

A downgrade in the U.S. credit rating would make it more expensive for the government to borrow. And that means the cost of public debt - currently $4.5 trillion - would grow more expensive.

Practically speaking, it's unlikely taxpayers would feel an immediate pinch from any unreimbursed costs of a rescue. "Would the taxpayer notice it? Probably not. But it will increase the amount of federal debt," Penner said.

And that will increase pressure on future administrations to either raise taxes or cut spending, or both.

Shares of troubled mortgage finance giants open sharply lower ahead of testimony by Bernanke and Paulson on financial crisis.

See all CNNMoney.com RSS FEEDS (close) July 15, 2008: 9:32 AM EDT

NEW YORK (CNNMoney.com) -- Shares of mortgage finance giants Fannie Mae and Freddie Mac continued their recent slide Tuesday ahead of a Senate hearing at which testimony by top officials will highlight their importance to the economy and the plans to provide them new levels of government support.

Shares of Fannie (FNM, Fortune 500) plunged 13% at the open of trading, on top of the 48% decline it has seen in the last six trading days. Freddie (FRE, Fortune 500) shares tumbled 16% early Tuesday, on top of their 51% slide in the last six days.

At 10 a.m. ET Federal Reserve Chairman Ben Bernanke is set to give his regularly-scheduled semi-annual testimony on the state of the economy before the Senate Banking Committee. At 11:30 a.m. he will be joined by Treasury Secretary Henry Paulson and Christopher Cox, chairman of the Securities and Exchange Commission.

Mortgage finance giants Fannie and Freddie are a key source of funding for banks and other home lenders. Their ability to provide that funding is seen as a key to any recovery in housing and the economy as a whole.

The companies were set-up by Congress, but they are owned by shareholders, who have fled the firms' stock recently on fears that continued problems in housing and rising mortgage defaults will force them to seek significantly more capital, a move that would dilute the value of existing shares.

Problems in the banking and home lending sectors were further highlighted by the failure of IndyMac, a California bank that was taken over by the federal government Friday evening in what could end up being the most costly bank failure in U.S. history. Stocks of many major regional banks plunged Monday on concerns over further failures and several were down again in pre-market trading Tuesday.

IndyMac had been a major provider of mortgage loans that did not demand lenders to provide full or any documentation of their income. There are likely to be questions about the state of banking and the risk of more failures at Tuesday's hearings.

Sunday evening Paulson announced a proposal by Treasury to have Congress raise the $2.25 billion it is allowed to loan the two firms, and even open the door for the federal government to buy shares in the two companies if needed. The Fed announced it stood ready to loan money to the firms if they needed access to funds ahead of congressional actions.

Just three weeks ago the Fed left interest rates unchanged for the first time in nine months as it said the risks of an economic slowdown appear to have diminished. But it warned at that time that tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

Against all odds, the smaller mortgage guarantor may have put itself in an even tighter spot than its more-famous sibling.

NEW YORK (Fortune) -- For years Freddie Mac has been overshadowed by its larger sibling Fannie Mae. But now Freddie seems to be coming into its own - and not in a good way.

Shares in the mortgage company plunged for a fourth straight day Monday as investors struggle to grasp the true state of its financial health.

Fannie and Freddie own or guarantee around half the mortgages outstanding in the U.S., so the debate has implications well beyond the stock market - a fact acknowledged in Sunday evening's statement of support for the firms from Treasury Secretary Henry Paulson.

Bulls say the companies, both of which endured bruising accounting scandals earlier this decade, have plenty of cash on hand and that both firms are in compliance with their regulatory capital requirements. Beyond that, Paulson's comments indicate that the firms can expect government assistance, via big credit lines from the Treasury and possible government stock purchases, if they run short of capital.

More pain to come
Yet bets against Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) stock continue to mount, as skeptics wager that losses tied to declining house prices, together with the firms' enormous leverage, will wipe out shareholders.

Skeptical investors and analysts believe that falling house prices will feed a surge in mortgage defaults that will leave the firms with losses in the tens of billions of dollars. That could wipe out the firms' existing capital cushions and force the companies to raise more money on punishing terms - or perhaps sell stock for a pittance to the government.

After opening higher Monday following Paulson's remarks and a successful sale of short-term debt at Freddie, both stocks resumed their slide in the afternoon, with Freddie dropping 17% to $6.43 and Fannie sliding 5% to $9.75. Fannie has lost half its value this month; Freddie is down 63%.

The steeper decline in Freddie shares reflects in part the observation that even if both firms are under the gun, Freddie's finances look worse.

At the end of the first quarter, the Reston, Va., company's balance sheet showed assets of $803 billion and shareholder equity - a measure of a firm's net worth - of just $16 billion. That means Freddie has just a dollar in equity for every $50 of mortgages and other assets it holds - a thin cushion indeed when house prices are falling.

Another measure of Freddie's balance sheet, reflecting its guarantee obligations as well as its mortgage portfolio, shows the firm holds just 70 cents worth of equity for every $100 of business on its books.

"Is this enough equity when your business consists of buying and guaranteeing mortgages?" Len Blum, a managing director at New York investment bank Westwood Capital, writes in a recent report. "How about when you conduct these activities in markets falling by 20% or more?"

If those numbers aren't scary enough, the Freddie math gets worse. Using the so-called fair-value balance sheet - whose numbers reflect the current value of assets, rather than their historical cost - Freddie's shareholder equity is actually negative to the tune of $5.2 billion.

And Blum says there are other signs of ill health on Freddie's balance sheet. He notes that Freddie carries a $16.6 billion deferred tax asset - an asset that is valuable to the company only when it makes money. Freddie has lost $3.7 billion over the past three quarters.

Investors are worried about Fannie Mae as well, but Blum says that by comparison with Freddie it looks like the very picture of ruddy good health. The firm had $843 billion in assets at the end of the first quarter, against $39 billion of equity - a ratio of about 22-to-1.

Using fair value accounting, Fannie's shareholders are still $12 billion in the black.

Freddie, of course, doesn't share the skeptics' viewpoint.

"The company's capital and liquidity resources will enable it to continue to serve its public mission as it has always done," said CEO Richard Syron in a statement Sunday.

Indeed, both firms have said they expect to emerge from the housing bust intact. In recent periods the firms have been involved in a staggering 80% of U.S. mortgage originations, as the private mortgage industry has essentially collapsed under the weight of bad subprime loans.

That near monopoly has allowed Fannie and Freddie to raise prices, making recent transactions more profitable. Fannie CEO Daniel Mudd said on the firm's earnings conference call this past spring that Fannie expects to "feast" on the mortgage market in the absence of meaningful competition.

Even so, the shares continue to fall as investors worry that the firms will be forced to raise more money by selling common shares at steeply reduced prices. Fannie has already raised more than $10 billion and Freddie some $6 billion, but Freddie has yet to collect on a promise to raise an added $5.5 billion later this year.

Analyst Paul Miller at FBR Capital Markets calls the latest selloff an instance of "recapitalization overhang" - meaning investors have become so convinced that the firms will raise new money by selling stock that they flee the shares in haste.

Blum says he expects Freddie to be able to raise new money, but he doubts $5.5 billion will be enough. He believes the government will end up buying shares, at sharply lower prices, before the housing bust is over.

Others believe the government will end up taking control of both Fannie and Freddie, in order to preserve their low-cost financing. Freddie Mac and Fannie Mae "don't need more capital - at least not immediately," writes Chris Whalen at Institutional Risk Analytics. "But they do need access to the capital markets at preferential rates."

Fannie Plan a `Disaster' to Rogers; Goldman Says Sell (Update3)

By Carol Massar and Eric Martin

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies' shares may fall another 35 percent and lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17. Freddie Mac fell 18 cents, or 2.3 percent, to $7.57 at 11:16 a.m. in New York Stock Exchange trading, while Fannie Mae rose 13 cents, or 1.3 percent, to $10.38.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.

Going `Bankrupt'

Rogers, a former partner of hedge fund manager George Soros, predicted the start of the commodities rally in 1999 and started buying Chinese stocks in the same year. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''

Fannie Mae and Freddie Mac each surged more than 20 percent in pre-market trading today after Paulson moved to stem a collapse in confidence in the two companies that purchase or finance almost half of the $12 trillion in U.S. home loans.

Fannie Mae's market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac's market value has shrunk to about $5 billion from $22 billion at the end of last year.

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''

Last Week's Slump

Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.

The Federal Reserve separately authorized the firms to borrow directly from the central bank.

Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.

Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.

Shorts Uncovered

Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''

bloomberg.net.

Mortgage backers' stocks surge in early trading, then start to lose ground again despite government plan to back them.

NEW YORK (CNNMoney.com) -- Shares of Freddie Mac and Fannie Mae saw early gains evaporate Monday as investors showed they were not convinced that government support will be enough to prop up the battered mortgage giants.

The continued weakness in share prices, which hovered near 17-year lows, is troubling because the two firms are crucial sources of home loan funding and key to any recovery of the economy.

The government announced steps Sunday to make funds available to the firms if necessary in a bid to reverse the slide in confidence this year. While experts applauded the Treasury Department and Federal Reserve for stepping in, they said the success of the efforts will ultimately be measured by market reaction.

Shortly after the U.S. markets opened, shares of Fannie (FNM, Fortune 500) jumped as much as 32%, while shares of Freddie (FRE, Fortune 500) jumped 26% higher.

But within the first half-hour of trading, the shares fell briefly into negative territory before rebounding to show only a narrow gain from Friday's close.

Even with those early gains, shares of the two companies had recovered only a fraction of the declines they suffered in trading last week.

Things were a touch better in credit markets, as Freddie received good prices on $3 billion in corporate debt it sold through auction early Monday morning.

Three-month bonds sold at a slightly lower interest rate than Freddie's previous auction a week earlier, while the six-month bond sold for only a narrowly higher price, according to wire service reports. That suggests that investors are more confident about the near term outlook for the firms than the long-term.

Government tries to assure investors
Treasury Secretary Henry Paulson said Sunday the Bush administration plans to ask Congress to pass legislation that would temporarily extend lines of credit from Treasury to the mortgage providers. Paulson also proposed that Treasury be given authority to buy equity in the companies.

In addition, the Federal Reserve announced that the Federal Reserve Bank of New York had been granted authority to lend to Fannie and Freddie should such lending prove necessary.

"This plan meets the policy requirements for a rescue," said Jaret Seiberg, a financial services analyst for the Stanford Group, a Washington research firm, in a note Monday morning. "It provides emergency liquidity measures and establishes a mechanism for injecting capital into the enterprises if needed."

Both companies said that they have adequate capital and that it is possible they might not need to turn to the Fed or Treasury for funds. The Office of Federal Housing Enterprise Oversight, the federal regulator that oversees the firms, also said on Sunday that the companies have enough capital.

Seiberg said it's too soon to tell if the plans announced Sunday are enough to see Fannie and Freddie through the current crisis.

"Ultimately, the success or failure of this plan rests with the market," he said.

University of Central Florida economist Sean Snaith said he agrees that the actions by Treasury and the Fed were prompted by market concerns more than any imminent problem the firms might have continuing normal operations.

"Using the stock market as a barometer is difficult to do in a case like this," Snaith said. "This crisis is essentially a crisis of confidence, and that confidence takes some time to restore."

Main player in mortgage market
The two firms, which were set up by the government, own or back about $5 trillion worth of home debt - half the mortgage debt in the country. They have suffered about $12 billion in losses between them since last summer.

Since the crisis in credit markets last year, they have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to do so is crucial to the recovery of the battered home market and the broader U.S. economy.

Despite their government-sponsored status, they are owned by shareholders, and those investors drove shares down by nearly half last week on concerns that they would not be able to raise the capital they need to cover future losses. The declining share price made it more difficult and expensive to raise that capital. Fear was rampant on Wall Street last week that a government bailout would leave shareholders' stake worthless.

Sen. Christopher Dodd, chairman of the Senate Banking Committee, told CNNMoney.com on Monday that he is confident Fannie and Freddie are sound, and he praised the actions by Treasury and the Fed Sunday.

"It looks as least that first blush that these ideas that are being floated are having the desired effect and that is to calm things down here and to restore some confidence that the people need to have in these [firms]," he said.

But he vowed to have hearings this week on both the plans to help Fannie and Freddie, as well as on the failure of California bank IndyMac, which was taken over by the Federal Deposit Insurance Corp. on Friday evening in the largest bank failure since 1988. IndyMac had been one of the leading lenders making home loans in which borrowers were not required to provide documentation of their income.

Government plan to bolster mortgage giants Fannie Mae and Freddie Mac lifts futures; dollar gains.

Last Updated: July 14, 2008: 7:25 AM EDT

NEW YORK (CNNMoney.com) -- Stock futures climbed Monday morning, lifted by a government plan to bolster ailing mortgage giants Fannie Mae and Freddie Mac.

At 7:09 a.m. ET, Nasdaq and S&P futures were higher, with a comparison to fair value suggesting opening gains for Wall Street.

Stocks tumbled last week on fears U.S. government-sponsored mortgage firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) would collapse, but investors appeared soothed by a U.S. plan to shore up the firms.

Mortgage rescue plan On Sunday, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke outlined a plan to prop up the two mortgage giants.

The plan would give Fannie and Freddie, which own or back about $5 trillion worth of home mortgages, a bigger line of credit with the Treasury Department. The firms will also be able to tap the Federal Reserve Bank of New York for funds.

Shares of the two mortgage-lending giants each jumped about 31% in premarket trading Monday on news of the government's assistance.

Beer deal Anheuser-Busch (BUD, Fortune 500), maker of Budweiser, agreed to a sweetened $52 billion takeover offer from Belgian brewer InBev. The deal will create the world's largest brewer.

Energy Oil prices fell as the dollar strengthened on the U.S. mortgage rescue plan. Crude prices, which hit a trading record of $147.27 on Friday, fell $1.54 to $143.54 in electronic trading Monday, while average prices for gasoline and diesel fuel at the pump hit new levels.

Industry General Electric Co. (GE, Fortune 500) announced that it would develop a new line of fuel efficient jet engines to compete with United Technologies Corp.'s (UTX, Fortune 500) Pratt & Whitney.

Microsoft-Yahoo Over the weekend, Yahoo, Inc. (YHOO, Fortune 500) rebuffed an attempt by Microsoft and activist investor Carl Icahn to buy the company's Internet search business.

Technology Microsoft Corp. formally announced late Friday that it was cutting the price on the lower-end model of its XBox 360 gaming console and introducing a new mid-range model with a 60GB hard drive.

It is also rumored that Microsoft (MSFT, Fortune 500) could announce a deal with video rental company Netflix, Inc. (NFLX) at the E3 video game industry conference in Los Angeles on Monday that would allow streaming movies and TV shows from Netflix to be played through the Xbox 360.

Other markets. In global trade, Asian markets ended lower. European markets climbed in morning trading.

The dollar gained against the euro in early European trading.

Paulson and Bernanke proposal would give mortgage finance giants bigger line of credit with Treasury and open NY Federal Reserve lending window.

Last Updated: July 14, 2008: 5:52 AM EDT


NEW YORK (CNNMoney.com) -- The Treasury Department and Federal Reserve on Sunday outlined a comprehensive government plan to prop up Fannie Mae and Freddie Mac - the two mortgage finance giants that play a crucial role in the U.S. economy.

Treasury Secretary Henry Paulson said the Bush administration plans to ask Congress to enact legislation to temporarily increase the line of credit that the companies have with the Treasury. It would also allow the Treasury to buy stock in the companies.

Paulson also said the Federal Reserve should be given a greater role supervising the finances of Fannie and Freddie.

In addition, the Federal Reserve announced Sunday that the mortgage finance companies can turn to the Federal Reserve Bank of New York for funds. The move gives Fannie and Freddie the same access to the funds as commercial banks and Wall Street firms. The agency granted investment banks such access earlier this year in the wake of a similar crisis of confidence when investors lost faith in Bear Stearns.

The decision by the government to step in comes at a tumultuous time for the two shareholder-owned companies, which own or back $5 trillion in home mortgages and are counted on to play a central role in the recovery of the battered housing market.

At issue is the companies' financial condition and whether their balance sheets are strong enough to continue their business of buying and guaranteeing home mortgages. The plan by the Treasury and the Fed would provide Fannie and Freddie with needed capital. Beyond that, even the promise of government support could be sufficient to calm investors.

Last week, investor concern sent shares of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) plummeting. The selloff left shares of both firms down more than 45% for the week and about 75% for the year.

"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies," Paulson said. "Their support for the housing market is particularly important as we work through the current housing correction," he added.

Provide crucial finance to housing markets
Fannie and Freddie provide a crucial source of funding for banks and other home lenders, especially since a credit market crisis last summer left them the only major players in packaging pools of mortgage loans into securities for sale to investors.

If they were unable to do so, it would raise the cost and restrict the availability of mortgage loans, causing more problems for already battered housing prices and sales. That in turn would be another significant problem for the overall U.S. economy, as well as global credit markets.

While investors have had doubts about Fannie and Freddie for years, the government is stepping in now because of the current heightened panic atmosphere on Wall Street.

"The market has its sights set on Fannie and Freddie," said Richard Yamarone, chief economist at Argus Research in New York. "With them in the target zone, the Fed and Treasury felt they had to act. [The agencies'] plan is being conducted to contain investors' fears from spreading to the rest of the market."

Sunday's announcement comes ahead of Monday's opening of the stock markets and a scheduled $3 billion debt sale by Freddie Mac.

"Now that you know you have the government's backing of these entities, that should go a long way to pacifying investor fears," Yamarone said.

The White House issued a statement Sunday evening urging Congress to act quicky - something that both Republican and Democrat leaders vowed to do.

Sen. Charles Schumer, D-N.Y., praised Paulson's plan. "While Fannie and Freddie still have solid fundamentals, it will be reassuring to investors, bondholders and mortgage-holders that the federal government will be behind these agencies should it be needed," he said. "The Treasury's plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers."

In fact, the extent of their troubles is in debate. Several analysts and a former Federal Reserve governor have said last week that the two companies desperately need to raise money.

Others, including Fannie and Freddie, their regulators, some Wall Street analysts, and Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, have defended the strength of the two companies.

"What's important are facts - and the facts are that Fannie and Freddie are in sound situation," Dodd said on CNN's Late Edition on Sunday before the announcements by Treasury and the Fed. "They have more than adequate capital. They're in good shape."

Access to capital
Fannie Mae and Freddie Mac, in statements Sunday, reiterated their financial strength. "We continue to hold more than adequate capital reserves and maintain access to liquidity from the capital markets," the Fannie statement said.

A Freddie statement pointed to the upcoming release of its quarterly results. "We expect the results will also show that we have a much greater surplus above the statutory minimum capital requirement. The company's capital and liquidity resources will enable it to continue to serve its public mission as it has always done."

While they now have access to the Fed funds, the companies likely won't need to use the privilege at this time, said Art Hogan, chief market analyst at Jefferies & Co. in New York. But the move will give investors additional confidence that Freddie and Fannie can tap the pool of liquidity backed by the federal government.

Further, unlike the Fed's decision to let investment banks trade mortgage-backed securities for federal funds, the government is not taking on a lot of risk by letting Fannie and Freddie step up to the window.

"They have a very conservative pool of loans," Hogan said. "You know what you've got here. It's pretty bread-and-butter."

Shares of mortgage finance firms recover most of deep losses from earlier in day on assurances that government takeover is not needed.

Last Updated: July 11, 2008: 2:37 PM EDT


NEW YORK (CNNMoney.com) -- The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, took stocks on a wild ride Friday.

An early selloff was fanned by speculation of looming bailout. The stocks recovered on assurances by a leading senator that no rescue is needed.

Immediately after the markets opened, shares of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) fell more than 47% from their already battered closing price the day before. They soon rebounded later in the morning but Fannie shares were still down about 24% and Freddie shares were off 22% in early afternoon trading.

The shares of both companies recovered most of their losses shortly after 2 p.m. when Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, defended the strength of both firms.

Dodd said that his discussions with Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the regulators who oversee the firms and the two companies' CEOs convinced him they have more than adequate capital and that there was no need to even discuss failure or a bailout.

He also vowed quick passage of a long-debated housing bill to give greater oversight of the two companies, saying he expected it to passed and ready to be signed into law sometime next week.

"There is a sort of a panic going on," he said. "The facts don't warrant that reaction in my view. Fannie Mae and Freddie Mac were never bottom feeders in the residential mortgage markets. People ought to feel confident about them."

While shares of Fannie were still off 10% after his remarks, Freddie shares were off only 3% when he concluded his comments.

Still, the problems for Freddie and Fannie weighed on broader markets, causing a sell-off in U.S. stocks, especially hitting major banks, Wall Street firms and home builders.

Fannie and Freddie hold or back $5 trillion between them, or about half the mortgage debt in the country.

They play a central role in the U.S. housing market, providing a crucial source of funding for banks and other home lenders, especially since a credit market crisis last summer left them the only major players in packaging pools of mortgage loans into securities for sale to investors.

If they were unable to do so, it would significantly raise the cost and restrict the availability of mortgage loans, causing significantly more problems for already battered housing prices and sales. That in turn would be another significant problem for the overall U.S. economy, as well as global credit markets.

Bailout discussions
The New York Times reported Friday that senior Bush administration officials are considering a plan to have the government take over one or both of the companies if their problems worsen.

The shares started to erase early losses when word came that Treasury Secretary Henry Paulson was set to speak. He said that the government's primary focus is making sure that mortgage giants Fannie Mae and Freddie Mac remain as presently constituted to carry out their mission.

Even before the latest report on a possible rescue plan, speculation about the future of the firms this week sparked a run by investors away from their shares. That in turn raised questions about how difficult and expensive it will be for them to raise needed capital in the future, which fed into the stock plunge in a vicious cycle.

In the first four trading days of the week, the shares of Fannie have lost 30% of their value, while Freddie shares have tumbled 45%. For the year, Fannie is down 67% and Freddie 77%.

"Fannie Mae and Freddie Mac have lost investor confidence evidenced by the rapid brutal sell-off in their stocks, which could dramatically hinder their ability to raise any additional capital going forward," wrote Richard Hofmann of research firm CreditSights in a note Friday. He added that the firms' ability to function normally "remain at the core of government efforts to stabilize the mortgage markets."

A number of scenarios were being discussed by bankers and analysts about what the government may do to deal with investors' current crisis of confidence in the firms.

Jaret Seiberg, a financial services analyst for the Stanford Group, a Washington research firm, said Thursday options that among the options are: The Federal Reserve could purchase some of the Freddie and Fannie debt or mortgage-backed securities; the Treasury Department could make billions of dollars in loans to the companies or even buy stock in the companies.

"Government officials are always planning for worst-case scenarios and our note is intended to highlight some options that may be available to policymakers," he wrote. "We suspect hybrid versions of these plans also are possible."

Under current law, the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie and Freddie, could take control of the firms if their capital falls too far below required levels. It is unclear how the firms would operate in that situation, known as a conservatorship.

OFHEO Director James Lockhart issued a statement late Thursday saying that his agency was closely monitoring the firms' credit and capital positions. But he pointed out that they had already raised $20 billion in capital and that they adequately capitalized, holding funds well in excess of his agency's requirements.

Investor panic
Still investors were worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.

"Our primary concern about Freddie and Fannie is that credit losses are likely to be worse than the management's current judgment, which will further pressure the capital base, and we remain cautious until we are better able to quantify these risks," wrote UBS analyst Eric Wasserstrom in a note Thursday.

Those concerns prompted him to raise his estimated loss for Freddie and to cut his price target for the stock, although, he retained his neutral rating on both firms, rather than urging clients to sell their holdings.

Part of the problem for the stock Friday is it is unclear if current shareholders would see their holdings wiped out under some of these government rescue options.

A Fannie spokesman said Friday morning that the company had no comment, while a spokeswoman for Freddie was not available for immediate comment. Both firms issued statements on Thursday saying they had the necessary capital to continue operating, adding they would not comment on the decline in their stock value.

Continued sharp slide in shares of mortgage finance firms raises new concerns about need for new capital, threat of government takeover.


NEW YORK (CNNMoney.com) -- The anxiety over Fannie Mae and Freddie Mac, which support $5 trillion in home loans, reached fever pitch on Friday as shares of the mortgage finance giants plunged in early trading.

Immediately after the markets opened, shares of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) fell more than 47% from their already battered closing price the day before. They soon rebounded slightly but Fannie shares were down 36% and Freddie shares were off 43% about a half hour after opening.

In the first four trading days of the week, the shares of Fannie have lost 30% of their value, while Freddie shares have tumbled 45%. For the year, Fannie is down 67% and Freddie 77%.

The two firms play a central role in the U.S. housing market, providing a crucial source of funding for banks and other home lenders.

If they were unable to do so, it would significantly raise the cost and restrict the availability of mortgage loans, causing significantly more problems for already battered housing prices and sales. That in turn would be another significant problem for the overall U.S. economy, as well as global credit markets.

The New York Times reported Friday that senior Bush administration officials are considering a plan to have the government take over one or both of the companies if their problems worsen.

The shares seemed to rebound when word came that Treasury Secretary Henry Paulson was set to speak.

A number of scenarios were being discussed by bankers and analysts about what the government may do to deal with investors' current crisis of confidence in the firms.

Jaret Seiberg, a financial services analyst for the Stanford Group, a Washington research firm, said Thursday options that among the options are: The Federal Reserve could purchase some of the Freddie and Fannie debt or mortgage-backed securities; the Treasury Department could make billions of dollars in loans to the companies or even buy stock in the companies.

"Government officials are always planning for worst-case scenarios and our note is intended to highlight some options that may be available to policymakers," he wrote. "We suspect hybrid versions of these plans also are possible."

Under current law, the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie and Freddie, could take control of the firms if their capital falls too far below required levels. It is unclear how the firms would operate in that situation, known as a conservatorship.

OFHEO Director James Lockhart issued a statement late Thursday saying that his agency was closely monitoring the firms' credit and capital positions. But he pointed out that they had already raised $20 billion in capital and that they adequately capitalized, holding funds well in excess of his agency's requirements.

Still investors were worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.

It is also unclear if current shareholders would see their holdings wiped out under some of these government rescue options - leading to the pre-market sell-off.

A Fannie spokesman said Friday morning that the company had no comment, while a spokeswoman for Freddie was not available for immediate comment. Both firms issued statements on Thursday saying they had the necessary capital to continue operating, adding they would not comment on the decline in their stock value.

News that government has begun to consider what to do if mortgage finance giants collapse sends battered shares sharply lower again.

NEW YORK (CNNMoney.com) -- Shares of Fannie Mae and Freddie Mac tumbled again Thursday on a report that government officials have begun planning for a possible collapse of the mortgage finance giants.

The Wall Street Journal reported that Bush administration officials have held talks about what to do in the event the two government-sponsored firms falter.

The government doesn't expect the firms to fail and no rescue plan is imminent, according to the report. But it reported that talks, which it said had previously been part of normal contingency planning, have become more serious recently given the financial woes and downward spiral in their stock prices.

In addition, William Poole, the former president of the St. Louis Federal Reserve, told Bloomberg in a Thursday report that the companies are already "insolvent."

Treasury Secretary Henry Paulson tried to allay some of the concerns about the firms Thursday. In testimony to the House Financial Services Committee, he said the firms are "working through this challenging period."

And earlier this week James Lockhart, director of the Office of Federal Housing Enterprise Oversight, which regulates the two firms, said in an interview with CNBC Tuesday that he believes Fannie and Freddie have done a good job raising adequate capital.

But those attempts to calm investors had little effect. In early trading Thursday, shares of Fannie (FNM, Fortune 500) lost 11% while those of Freddie (FRE, Fortune 500) plunged 25%. Those losses are on top of the more than 60% declines in the two stocks already this year heading into Thursday.

Fannie and Freddie are crucial components to the nation's home lending industry, as they buy pools of mortgage loans and sell securities backed by the payments from those loans.

The two companies own or guarantee about $5 trillion of mortgages -- or nearly half of all U.S. home-mortgage debt outstanding.

"The housing market can not recover unless Fannie and Freddie are out there actively securitizing home mortgages," said Jaret Seiberg, financial services analyst for research firm Stanford Group.

The historic decline in home sales and values has already led to a sharp downturn in the economy So the viability of Fannie and Freddie is crucial to the nation's chances of an economic recovery.

"If Fannie or Freddie failed...it could throw the economy into depression or something close to it," Sean Egan, head of credit ratings firm Egan Jones, told Fortune earlier this week.

Because the shareholder-owned firms were set up by acts of Congress, they have always operated with the assumption that the federal government stands behind their guarantees.

But if Fannie and Freddie were unable to raise the funds to cover their rising losses, it is quite likely shareholders could have their holdings wiped out.

Shareholders are also concerned that rising mortgage defaults and delinquencies will cause additional losses for the firms, which in turn could force them to seek additional capital that will likely dilute the value of current shareholders' holdings.

But the rapid plunge in the stocks this week makes efforts to turn around Fannie and Freddie without a government bailout more difficult.

"The more the stock price goes down, the harder it is for them to raise capital -- which makes investors nervous," said Frederick Cannon, managing director at Keefe, Bruyette & Woods, earlier this week. "It is a vicious cycle."

Spokespeople at Fannie and Freddie both had no comment on the Journal report. Earlier this week they said they had no comment on the declines in the firms' stock prices.