Record bail-out in US of Fannie Mae and Freddie Mac

THE US TREASURY will today announce a rescue of Fannie Mae and Freddie Mac, two giant American mortgage banks, in what is likely to be the biggest financial bail-out of recent history.

The move may trigger a bounce in global stock markets tomorrow. However, analysts warn that some of the uncertainties that plagued the markets last week, including worries over the duration of the credit crunch, will persist.

Henry Paulson, the US Treasury secretary, is believed to have told the chief executives of the two government-sponsored enterprises – Fannie Mae’s Daniel Mudd and Freddie Mac’s Richard Syron – that they will lose their jobs when the two firms, which control about 75% of the US mortgage market, are put into “conservatorship” today.

The boards of both Fannie Mae and Freddie Mac have been attempting to resist moves by the Treasury that would wipe out shareholders.

Paulson, however, is said to be keen to ensure any support for the companies comes at a price. The US government’s cash injection is expected to be between $15 billion (£8.5 billion) and $20 billion.

Some analysts said the action would boost confidence in the short term. David Buik at BGC Partners said: “It all comes down to whether or not we see the colour of their money. There have been a number of false dawns for Fannie and Freddie, which have amounted to nothing more than platitudes from Henry Paulson, who has assured us he would stand behind these organisations. If this is to work it has to be the real deal.”

Buik added that he expects the FTSE to bounce tomorrow morning after New York’s rally on Friday, which came in anticipation of a rescue of the two mortgage agencies. A bail-out of the two organisations would wipe out value for shareholders, but oil the wheels of the financial system.

Freddie and Fannie are among the world’s biggest counterparties on derivatives trades. These positions have all been marked down following fears about their financial stability. If the government were to intervene, the positions would be marked up, providing a boost to the system.

But other analysts feared government control could backfire. “If there is a bounce, it’s a false one. If anything, the situation has changed for the worse. We knew these companies were too big to fail; now it is the government that’s on the line instead of them,” said veteran analyst Richard Bove at Ladenburg Thalmann. He said unless the government had a plan for what to do next this was an “unbelievably negative move” that would increase the government deficit and could impact on America’s ability to borrow money.

The weekend talks followed a week in which stock markets were shaken by more bad economic news. Repossessions in America accelerated to the fastest pace in almost three decades during the second quarter, the Mortgage Bankers Association announced on Friday.

In the UK, the British Retail Consortium’s monthly retail sales monitor is expected to show a fall in August compared with a year earlier. This would make it the fifth out of six months in which like-for-like sales have shown an annual fall.

Retailers say the squeeze on incomes, rising unemployment and pessimism over the economic outlook are all hitting trade.

Not all retailers are suffering, however. The John Lewis Partnership said sales at its department stores and Waitrose supermarkets were up by 1.7% on a year earlier in the week to August 30.

However, DSG, which owns PC World and Currys, last week reported a 7% drop in like-for-like sales in the 16 weeks to August 23.

Meanwhile, gloom in the housing market, with the Halifax reporting a 12.7% drop in prices in the 12 months to August, spread to new-car sales, which last month showed an 18.6% drop on a year earlier.

September 7, 2008
Iain Dey, David Smith and Dominic Rushe in New York

Source: The Sunday Times

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