February 11, 2009 2:38 PM
- Text
Stocks Mixed In Wake Of Mortgage Bailout
(CBS/AP)
Stocks turned mixed in morning trading Monday as investors lost some of their initial enthusiasm over the government's plans to shore up confidence in mortgage financiers Fannie Mae and Freddie Mac.
Shares of the government-chartered companies advanced in volatile trading after tumbling last week amid concerns they would succumb to losses in their mortgage portfolios. Statements Sunday from the Treasury and the Federal Reserve that they would aid the companies if needed has eased some worries of further turmoil in the credit markets.
The Fed hopes to bolster eroding investor confidence by making the lending offer to the two companies "should such lending prove necessary." The plan, unveiled Sunday, was intended to signal the government is prepared to take all necessary steps to prevent the credit market troubles that erupted last year with losses from subprime mortgages from engulfing financial markets.
Treasury Secretary Henry Paulson said his department is asking Congress for quick approval of a plan to expand its line of credit to the two companies and to make an equity investment in them if necessary. They would pay 2.25 percent for any borrowed funds - the same rate given to commercial banks and big Wall Street firms.
The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."
Wall Street has been on edge about the well-being of the companies because Fannie Mae and Freddie Mac hold or back $5.3 trillion of mortgage debt, about half the outstanding mortgages in the United States. Worries over their future led to a volatile session Friday in which the Dow Jones industrial average dipped below the 11,000 mark for the first time in about two years before paring its losses.
Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies and make an equity investment in the companies - if needed.
"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 Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."
The Treasury's plan also seeks a "consultative role" for the Federal Reserve in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed's role would be to weigh in on setting capital requirements for the companies.
Hoping to bolster confidence, Senate Banking Committee Chairman Chris Dodd, a Connecticut Democrat, told CBS News Early Show anchor Harry Smith that Fannie and Freddie are financially sound.
"What's important is to calm people's fears," Dodd said. "These are very well capitalized at more than adequate levels. They weren't bottom feeders when it came to these subprime mortgages like other banks were. There's a lot more reason to have confidence in what's going on here than to have fear take over."
Last week Fed Chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, made a point of saying that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, has found both companies adequately capitalized.
The White House, in a statement, said President Bush directed Paulson to "immediately work with Congress" to get the plan enacted. It also said it believed the steps outlined by Paulson "will help add stability during this period."
Investors may not be as sanguine, however, according to Chris Johnson, an investment manager and president of Johnson Research Group in Cleveland. Stocks of financial institutions "are going to get clobbered," he predicted. "It is a situation where regulators and the government are trying to play catch up, and that means everything is not discounted in the stock prices yet."
The government denied it, but what has been seen by investors as an implicit guarantee of support has allowed Fannie and Freddie over the years to borrow at rates only slightly higher than the Treasury - and lower than what their banking competitors had to pay.
"This really blows away the notion of an implicit guarantee," independent banking consultant Bert Ely said of the Treasury's plan to ask Congress to allow it to make equity investments in Fannie Mae and Freddie Mac. "It suggests a greater concern about how these companies are doing. It says the problems are deeper. It gets to the solvency of the companies, not just the liquidity."
A critical test of confidence will come Monday morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities.
Under normal circumstances, Freddie Mac - one of the lynchpins of the nation's mortgage financing system - would have little trouble selling $3 billion in securities. But, as CBS News correspondent Randall Pinkston reports, these are not normal times.
On Friday at one point, Freddie Mac and Fannie Mae's stock values dropped more than 40 percent. In the past nine months, the government-sponsored enterprises lost $11 billion. All of this comes in the wake of a national real estate decline, triggered by the subprime mortgage crisis.
And although investors were on edge about the sharply declining stock values on Friday, some economists were confident that the mortgage industry would rebound - with a little help from the government, Pinkston reports.
"I really think at the end of the day the government will step in, the marketplace will step in, the housing market is just not going to stop functioning in America, that's just not going to happen," said Steve Massoca, an economist with Pacific Growth Equities.
Fannie and Freddie were created by the government to provide more Americans the chance to own a home by adding to the available cash banks can loan customers.
A senior Treasury official said any increase in the line of credit - now at $2.25 billion for each company would be at the Treasury secretary's discretion. The same would apply to any equity investment made by the government.
The official, who spoke on condition of anonymity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday."
If one or both of the companies were to fail, it would wreak havoc on the already fragile financial system and the crippled housing market. The problems would spill over in the national economy, too.
Paulson on Friday said the government's focus was to support the pair "in their current form" without a takeover.
The Democrat Senate Majority Leader Harry Reid said: "Senate Democrats stand ready to work with the administration to quickly and effectively address the situation currently facing these institutions."
House Republican leader John Boehner and Republican Whip Roy Blunt said they "stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets."
Democratic presidential contender Barack Obama said the government's main concern should be "to make sure that home ownership remains attainable and affordable for American families. Second, any measures should protect taxpayers and not bailout the shareholders and management of Fannie Mae and Freddie Mac."
Republican rival John McCain believes the measures announced Sunday "are consistent with the goal of providing support for a path through the current duress toward steps that include regulatory reform, market discipline and mission focus," said Douglas Holtz-Eakin, senior policy adviser.
Shares of the government-chartered companies advanced in volatile trading after tumbling last week amid concerns they would succumb to losses in their mortgage portfolios. Statements Sunday from the Treasury and the Federal Reserve that they would aid the companies if needed has eased some worries of further turmoil in the credit markets.
The Fed hopes to bolster eroding investor confidence by making the lending offer to the two companies "should such lending prove necessary." The plan, unveiled Sunday, was intended to signal the government is prepared to take all necessary steps to prevent the credit market troubles that erupted last year with losses from subprime mortgages from engulfing financial markets.
Treasury Secretary Henry Paulson said his department is asking Congress for quick approval of a plan to expand its line of credit to the two companies and to make an equity investment in them if necessary. They would pay 2.25 percent for any borrowed funds - the same rate given to commercial banks and big Wall Street firms.
The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."
Wall Street has been on edge about the well-being of the companies because Fannie Mae and Freddie Mac hold or back $5.3 trillion of mortgage debt, about half the outstanding mortgages in the United States. Worries over their future led to a volatile session Friday in which the Dow Jones industrial average dipped below the 11,000 mark for the first time in about two years before paring its losses.
Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies and make an equity investment in the companies - if needed.
"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 Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."
The Treasury's plan also seeks a "consultative role" for the Federal Reserve in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed's role would be to weigh in on setting capital requirements for the companies.
Hoping to bolster confidence, Senate Banking Committee Chairman Chris Dodd, a Connecticut Democrat, told CBS News Early Show anchor Harry Smith that Fannie and Freddie are financially sound.
"What's important is to calm people's fears," Dodd said. "These are very well capitalized at more than adequate levels. They weren't bottom feeders when it came to these subprime mortgages like other banks were. There's a lot more reason to have confidence in what's going on here than to have fear take over."
Last week Fed Chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, made a point of saying that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, has found both companies adequately capitalized.
The White House, in a statement, said President Bush directed Paulson to "immediately work with Congress" to get the plan enacted. It also said it believed the steps outlined by Paulson "will help add stability during this period."
Investors may not be as sanguine, however, according to Chris Johnson, an investment manager and president of Johnson Research Group in Cleveland. Stocks of financial institutions "are going to get clobbered," he predicted. "It is a situation where regulators and the government are trying to play catch up, and that means everything is not discounted in the stock prices yet."
The government denied it, but what has been seen by investors as an implicit guarantee of support has allowed Fannie and Freddie over the years to borrow at rates only slightly higher than the Treasury - and lower than what their banking competitors had to pay.
"This really blows away the notion of an implicit guarantee," independent banking consultant Bert Ely said of the Treasury's plan to ask Congress to allow it to make equity investments in Fannie Mae and Freddie Mac. "It suggests a greater concern about how these companies are doing. It says the problems are deeper. It gets to the solvency of the companies, not just the liquidity."
A critical test of confidence will come Monday morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities.
Under normal circumstances, Freddie Mac - one of the lynchpins of the nation's mortgage financing system - would have little trouble selling $3 billion in securities. But, as CBS News correspondent Randall Pinkston reports, these are not normal times.
On Friday at one point, Freddie Mac and Fannie Mae's stock values dropped more than 40 percent. In the past nine months, the government-sponsored enterprises lost $11 billion. All of this comes in the wake of a national real estate decline, triggered by the subprime mortgage crisis.
And although investors were on edge about the sharply declining stock values on Friday, some economists were confident that the mortgage industry would rebound - with a little help from the government, Pinkston reports.
"I really think at the end of the day the government will step in, the marketplace will step in, the housing market is just not going to stop functioning in America, that's just not going to happen," said Steve Massoca, an economist with Pacific Growth Equities.
Fannie and Freddie were created by the government to provide more Americans the chance to own a home by adding to the available cash banks can loan customers.
A senior Treasury official said any increase in the line of credit - now at $2.25 billion for each company would be at the Treasury secretary's discretion. The same would apply to any equity investment made by the government.
The official, who spoke on condition of anonymity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday."
If one or both of the companies were to fail, it would wreak havoc on the already fragile financial system and the crippled housing market. The problems would spill over in the national economy, too.
Paulson on Friday said the government's focus was to support the pair "in their current form" without a takeover.
The Democrat Senate Majority Leader Harry Reid said: "Senate Democrats stand ready to work with the administration to quickly and effectively address the situation currently facing these institutions."
House Republican leader John Boehner and Republican Whip Roy Blunt said they "stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets."
Democratic presidential contender Barack Obama said the government's main concern should be "to make sure that home ownership remains attainable and affordable for American families. Second, any measures should protect taxpayers and not bailout the shareholders and management of Fannie Mae and Freddie Mac."
Republican rival John McCain believes the measures announced Sunday "are consistent with the goal of providing support for a path through the current duress toward steps that include regulatory reform, market discipline and mission focus," said Douglas Holtz-Eakin, senior policy adviser.
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