Knock, Knock … It’s the U.S. Government
- Jul 17, 2008
This week, the U.S. government said it would step in to help bolster Fannie Mae and Freddie Mac.
Despite the fact they each have access to a $2 billion line of credit from the government, the two mortgage companies are, for the most part, private firms.
On Sunday, Treasury Secretary Henry Paulson suggested increasing that line of credit significantly. The Fed also said it would let the agencies borrow money at a special rate.
Déjà vu Rescue
This isn’t the first time the government has stepped in to assist a company this year.
Four months ago, the government–with no official congressional approval–utilized emergency rights to stop investment firm Bear Stearns from collapsing, a move that was most likely justified to prevent a global economic fallout, the Washington Post says.
And because the effect of the ongoing credit crisis is being felt on a global scale, government intervention isn’t limited to the U.S.
In September, the Bank of England stepped in to save U.K.-based lender Northern Rock, which had asked for help, creating the first run on a U.K. bank since Victorian Times, according to the Independent.
And–because no one is sure the global credit issues are close to over–the U.S. isn’t ruling out further intervention in its investment banks’ affairs, including:
- Additional funding. Last week, Fed Chairman Ben Bernanke said that the Fed might continue to provide emergency funding to other investment banks past the original September expiration date.
- Oversight rights. He also said that the Fed and the Securities and Exchange Commission have worked out an agreement that will allow the Fed to access investment banks’ private data.
A Friend to Fannie and Freddie
And now, the U.S. government is lending Fannie Mae and Freddie Mac a hand.
The agencies own or guarantee almost half of the $12 trillion in U.S. residential mortgage debt, according to Bloomberg.
For years, they’ve been an integral part of the housing market. And recently, in an effort to help correct the housing slump, they’ve been given greater access to it by being allowed to enter the jumbo loan market.
"The GSEs now touch 70 percent of new mortgages and represent the only functioning secondary mortgage market," Paulson told senators. "The GSEs are central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction."
The government has quite a bit invested in their success–and good reason to make sure they don’t go away.
"Shares of Freddie have fallen and things are bad for them on paper, but in day-to-day life, it has not affected them at all," Susan Blumberg, senior vice president of NorthMarq’s Chicago office, told MHN. "We have a very strong working relationship with Freddie. The way we see it, the multifamily aspect of these companies has been very strong with low delinquencies. This is a knee-jerk reaction toward their single-family business."
And, if the government can help with some extra capital, the agencies should look even stronger soon.
There’s been a lot of news involving Fannie and Freddie lately; but many in the industry think most of the hype is unfounded, including Jerry Howard, executive vice president and CEO of the National Association of Home Builders (NAHB).
"Fundamental analysis and statements from top federal government officials point out that the hysteria in the markets regarding the viability of Fannie Mae and Freddie Mac is unfounded," Howard said.
And–government assistance or no government assistance–Freddie Mac is confident about the future.
"We continue to hold more than adequate capital reserves and maintain access to liquidity from the capital markets," Daniel H. Mudd, president and CEO of Fannie Mae, said in a statement. "Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market. We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future."
Which poses an interesting question: Should the government intervene more often in private financial company problems, like it did with Bear Stearns, or should it have a hands-off policy?
Some analysts say that as the U.S. economy continues to struggle and the global economy works its way through the current credit issues, government help will become more and more necessary to contain any fallout.
Others argue the government has no place monitoring private companies–or helping them with monetary infusions.
What do you think? Is it a good idea for the government to intervene in private company affairs?
Share your thoughts by posting below.