Regulator: Fannie, Freddie Needed Tsy Help To Raise Capital
09/25 12:18 PM
WASHINGTON (Dow Jones)--The regulator for Fannie Mae (FNM:$2.68,00$0.94,0054.02%) and Freddie Mac (FRE:$2.94,00$1.05,0055.56%) told lawmakers that the federal government decided to seize control of the mortgage giants after they both reported they wouldn't be able to bolster their capital position without help from the U.S. Treasury.
Federal Housing Finance Agency Director James B. Lockhart painted a stark picture of the pressures mounting on the government-sponsored enterprises in the weeks before the government took them over, arguing that by August the only alternative for the firms would have been to start selling off assets as the housing market was tanking.
"That would have been disastrous for the mortgage markets, as mortgage rates would have continued to move higher and, in turn, disastrous for the enterprises as the prices of their securities would have fallen and credit losses increased, " Lockhart told members of the House Financial Services Committee.
He said that the firms' deteriorating financial position, coupled with the worsening housing and capital market conditions, led him to act jointly with Treasury to seize the firms on Sept. 7.
He said that by August, the firms' borrowing costs were climbing and it became clear the firms wouldn't be able to raise capital in any "meaningful size." Meanwhile, central banks stopped buying their securities, while ratings firms notched down their ratings on all but their senior debt.
These factors "convinced us that the time to act was now," Lockhart told members of the committee.
He said that it became clear during the regulator's review of the companies earlier in July that conditions were worsening faster than either firm had anticipated.
During the last part of July and in early August, there were "significant and critical weaknesses across the board" in terms of credit, market and operational risk, Lockhart said.
Lockhart said FHFA did not take its decision lightly, and that the agency consulted with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson beforehand.
The goal of taking control of the two firms is "to help restore confidence in Fannie Mae (FNM:$2.68,00$0.94,0054.02%) and Freddie Mac (FRE:$2.94,00$1.05,0055.56%) , enhance their capacity to fulfill their mission, reduce the systemic risk and make more mortgages available at a lower cost to the American people," he said.
-Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@ dowjones.com
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http:// www.djnewsplus.com/al?rnd=AJZr27%2BhR5N7y%2BByhI1ECg%3D%3D. You can use this link on the day this article is published and the following day.
(END) Dow Jones Newswires
09-25-081218ET
Copyright (c) 2008 Dow Jones & Company, Inc.
