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Could Fannie, Freddie avoid a bailout?

John Dimsdale Aug 25, 2008

Could Fannie, Freddie avoid a bailout?

John Dimsdale Aug 25, 2008


KAI RYSSDAL: Even if you weren’t paying real close attention last week, you probably noticed something was amiss with Fannie Mae and Freddie Mac. Share prices for the government-sponsored mortgage companies were going nowhere but down. There was respectable speculation that some sort of federal intervention was likely.

And then all of a sudden it was this morning. And nothing. No panic. No takeover. And no problem for Freddie Mac as it tried to sell off $2 billion-worth of short-term debt. That suggests Fannie and Freddie just might be able to keep on going without help from the Treasury Department. But our Washington Bureau Chief John Dimsdale reports the pair aren’t out of the woods just yet.

JOHN DIMSDALE: Most investors are betting the housing slump will leave Fannie and Freddie insolvent without some sort of emergency support from the government.

MARILYN COHEN: I think we’re talking about a monumental problem.

Marilyn Cohen, the president of Envision Capital Management, says the government has to help Fannie and Freddie because shareholders include some major cogs in the economy’s machinery. Pension funds and small banks rely on Fannie and Freddie dividends for capital that they couldn’t raise anywhere else, especially given the current credit crunch. Small banks might be pushed into bankruptcy — not to mention international central banks that hold Fannie and Freddie’s preferred shares.

COHEN: Considering we rely not only on the kindness of foreigners and foreign central banks to help prop up our huge deficits, we are really relying on their need for safety. And I think the thought of them not making their payments is pretty unthinkable.

DIMSDALE: Essentially, you are looking at a Treasury bailout to save the world’s financial system.

COHEN: Well, I don’t think that’s too overdramatic. Yes.

Not helping Fannie and Freddie could also mean higher priced mortgages. Still, Peter Wallison of the American Enterprise Institute thinks the government should do nothing.

PETER WALLISON: To see whether they can survive by raising their own capital. Or, because the real estate market has stabilized. And if it does not happen, then the government should put them into receivership.

In Washington I’m John Dimsdale for Marketplace.

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