Friday, August 22, 2008

The three Fs -- Fannie, Freddie and Failure

Friday's cut in the credit ratings of Fannie Mae and Freddie Mac raises the likelihood that the U.S. government-backed mortgage-finance companies will be swept under the raging tide of the housing industry collapse like millions of homeowners who have lost their homes. Fannie Mae and Freddie Mac, which underwrite half of all mortgages in the United States, are in danger of going under in the foreclosure crisis unless the U.S. Treasury intervenes. The companies, known as government-sponsored enterprises, are too important to be allowed to fail. But what role will the government assume in the bailout, which is expected by most observers? The taxpayers are obligated to back the mortgages, but Fannie and Freddie are more complicated than that because they also have sold common and preferred stock that are traded on public exchanges. The companies' common stock, which sold for as much as $65 last year, is trading at only a few dollars per share because traders expect any bailout to eliminate the stock's value. Moody's Investors Service cut the two companies' preferred stock ratings to "Baa3" from "A1," and the bank financial strength rating to "D-plus" from "B-minus," according to the Reuters international news service. Even noted stock market investor Warren Buffett said there was a "reasonable chance" that Fannie and Freddie stock will get wiped out in a government rescue, Reuters said.

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