Paulson stands by Fannie and Freddie
By James Politi in Washington and Saskia Scholtes in New York
Published: July 11 2008 18:46 | Last updated: July 12 2008 01:13
The Bush administration on Friday attempted to quash suggestions that the US government might have to nationalise Freddie Macand Fannie Mae, the giant mortgage companies that have unsettled the financial markets.
Hank Paulson, Treasury secretary, said: “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” signalling that the Bush administration was not contemplating a rescue takeover of the two groups and wanted public shareholders to continue owning them.
Describing Freddie and Fannie as “very important institutions”, President George W. Bush said Mr Paulson and Ben Bernanke, head of the Federal Reserve, would be “working this issue very hard”.
Chris Dodd, Democratic chairman of the Senate banking committee, on Friday also said the Fed and the Treasury were considering opening the Fed’s discount window to Fannie and Freddie.
However, the Fed said there had been “no discussions” with Fannie Mae and Freddie Mac on access to the discount window.
Meanwhile, IndyMac Bank on Friday night became the biggest savings bank to fail in US history as regulators closed down the troubled California mortgage lender following continued demands by customers for their deposits.
Fears that Fannie and Freddie could become victims of the credit crisis have gripped investors this week. The institutions are pillars of the financial system, holding or guaranteeing nearly half of the $12,000bn in outstanding US mortgages and three-quarters of new loans.
Shares in both companies opened sharply lower on Friday – with Freddie down as much as 50 per cent – but rebounding following Mr Dodd’s comments. Freddie ended the day 3.1 per cent lower at $7.75 while Fannie fell 22.4 per cent to close at $10.25.
Shares in Lehman Brothers also fell another 16 per cent in spite of a report from Standard & Poor’s reaffirming the struggling investment bank’s “solid liquidity and funding profile”
The Dow Jones Industrial Average fell below 11,000 points in the day for the first time in two years – before closing down 1.1 per cent at 11,100.54 – and crude oil prices rose to a record above $147 a barrel before falling back to about $144 a barrel.
As house prices have fallen and foreclosures have soared, Fannie and Freddie have suffered deep losses, which they have tackled by raising more capital.
Many observers believe a collapse of Fannie and Freddie could bring the US mortgage market to a complete standstill.