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What's the plan for Fannie and Freddie?

The Fannie Mae building in Washington, D.C.

TEXT OF INTERVIEW

KAI RYSSDAL: We have made it to another Friday, gang. But it kind of feels like we made it by the skin of our teeth. Maybe it's a good thing the markets are closed for the next two day because everybody's going to need some time to catch their breath. The basics of the story you know already I think -- that the government-backed mortgage giants Fannie Mae and Freddie Mac have seen better days.

Even before the opening bell rang this morning things had taken a turn for the worse. And maybe that's why everybody grabbed onto the rumors that the Fed chairman was going to help out.

Our Senior Business Correspondent Bob Moon is here to make us smart.

Hiya, Bob.

BOB MOON: Hey, Kai. I hope so.

RYSSDAL: Yeah, right, me too. Once again, anyway, on the face of it, Ben Bernanke to the rescue here.

MOON: Well, maybe. If the government's trying to shore up confidence in Fannie Mae and Freddie Mac, though, they're not sending a very clear signal as yet. This afternoon there were reports that the Fed is preparing to open its emergency lending window to make sure that those mortgage giants have adequate cash flow. But then soon after a Fed spokesman denied that. And, you know, it's just these kind of conflicting signals that are what created this real crisis overnight.

Investors went to bed with a reassurance from the top regulator of Fannie Mae and Freddie Mac that they both remain adequately capitalized and have large liquidity pools. Well, they woke up this morning to a story in The New York Times that the White House might put one or both of these companies under the control of a conservator. That would be a party or an institution that would then have the authority to make sweeping changes in the way they do business.

RYSSDAL: OK, but help me understand why Wall Street gets so spooked by that.

MOON: Well, if you're an investor who holds Fannie or Freddie stock, you're probably going to choke on your morning toast when you open up the paper and you read this paragraph:

"Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing."

And that's why their shares went into free fall and lost half their value at one point today.

RYSSDAL: But then there were these reports mid-afternoon that Bernanke had met with Fannie Mae and Freddie Mac and said, in essence, "We have this discount window, a ready source of cash. Come get it, if you need it."

MOON: Followed immediately by that official denial that any decision has been made. Seems the government is wrestling with how to deal with this crisis. There is intense pressure, though, to take swift action of some sort.

RYSSDAL: If these guys, though, are just too big to fail -- Fannie Mae, Freddie Mac, trillions of dollars of debt, huge impact on the mortgage market -- how far is the government prepared to go, then, to bail them out?

MOON: Well, bailout may be the wrong word here -- if we're talking a full-scale bailout. That would really amount to the nuclear option in this case. Figure it this way. We're talking about companies that own or stand behind $5 trillion-worth of outstanding debt. Well, the entire national debt is around $9.5 trillion, so we'd be adding half-again as much to that overnight. Just really unlikely to happen.

RYSSDAL: You mention this became a crisis overnight, from yesterday into today. It's not possible that nobody saw this coming.

MOON: It's actually been building for months now. All these big financial institutions have been struggling to pump in more cash to make up for what they've lost with all these outstanding loans going bad. In the case of Fannie and Freddie, Congress set them up and gave them very special treatment. They've enjoyed triple-A credit ratings because of this implied or inferred bullet-proof guarantee from the government. And they haven't really even had to maintain the piggy bank that most banks are required to for a rainy day.

Now, let me remind you, this is not something that's just suddenly been discovered. Here's a familiar voice from the past, Kai. This is Alan Greenspan. He was warning Congress about this very worry back when he was Fed chairman in 2004.

ALAN GREENSPAN: Unlike many well-capitalized savings & loans and commercial banks, Fannie and Freddie have chosen not to manage that risk by holding greater capital.

Now, up to now they've had no problem going to Wall Street with hat in hand, but that option seemed to be foreclosed on them.

RYSSDAL: Nice to hear Greenspan's voice, wasn't it? You know, just a blast from the past.

MOON: Let's bring him back.

RYSSDAL: This whole thing, this potential for a meltdown, government bailout, everybody jumping around like the world's coming to an end . . . It has vague memories of Bear Stearns.

MOON: It sure does. Something of a self-fulfilling prophecy here. The fundamentals are good, they say, but then the crisis of confidence can erode all of those fundamentals.

RYSSDAL: And how busy do you think all these regulators and everybody are going to be this weekend on the phone trying to stop something bad from happening Monday.

MOON: I think the phone lines are still going to be buzzing all weekend long.

RYSSDAL: Marketplace's Bob Moon. Thank you, Bob.

MOON: Thanks, Kai.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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I don't agree with Bob Moon sometimes but he sure has a sense of humor: "...but that option seemed to be foreclosed on them."

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