Federal Government will intervene two mortgage giants
The intervention of the mortgage companies Fannie Mae and Freddie Mac by the federal government, it was decided to race after the Treasury Department advisers who reviewed the book concluded that the accounting methods had overstated its cash cushion, according to officials policy were briefed on the matter.
The proposed putting both companies, which have supported or $ 5.3 trillion in mortgages, controlled by the federal government also was due to the strong concerns among foreign investors of both companies have no capital to pay its debts. The sharp drop in the price of housing, which is expected to lead to more executions of mortgage loans owned or guaranteed by Fannie and Freddie, contributed to the urgency, informed the regulatory authorities.
At the close of this edition did not know all the details of the operation, but it seems that investors have in common securities companies basically lost everything; investors with preferred stock, with priority over other shareholders, should receive government support . The top executives of both companies will be replaced, according to those who were briefed on the plan.
Although it is too early to calculate the cost of federal intervention, could reach tens of billions of dollars and is probably one of the most expensive rescues financed by the taxpayer. The speech comes shortly after the rescue of investment bank Bear Stearns, which was sold to JPMorgan Chase in an operation supported by public money. The mortgage crisis has cost to consumers and investors hundreds of billions.
The two presidential candidates expressed support for plans by the government deemed necessary. Senator Barack Obama said while was campaigning in Indiana who do not act now could affect even more the real estate market. "These entities are so large and so are linked to real estate market that is probably true that steps must be taken to ensure that they do not break''said Obama yesterday in Terre Haute. But he added that the government needs to take steps to prevent Fannie Mae and Freddie Mac benefit from government assistance.
For his part, Senator John McCain, long a strong critic of the two mortgage giants. His companion ballot, the governor Sarah Palin, spoke at a political rally in Colorado Springs: "Fannie Mae and Freddie Mac have become too large and costly to the taxpayer.''
"The government will reduce the McCain-Palin and become a [tool] assistance that benefits the owners who most need it.''
The big question now is whether the decision by the federal government will restore confidence of investors in the credit market in the country, helping stabilize the stock market and maintains the supply of credit to those who meet the requirements.
Fannie and Freddie, by purchasing mortgages, offered to banks and other financial institutions make money for new loans, a vital lubricant to the real estate markets and credit.
As a result of government intervention, the cost of borrowing Fannie Mae and Freddie Mac should get off because the government will assure its debt. Equally important, as the government gives financial support to both companies, will continue the sale of mortgage loans.
But the plan will probably do little to stop the low house prices. And the foreclosure surely continue to rise.
Just one week, Treasury officials were studying a wide range of options for Fannie Mae and Freddie Mac, que iban from doing nothing to intervene completely, according people familiar with the discussions.
Henry M. Paulson, Treasury secretary and received authorization from Congress last month to use public funds to strengthen both companies financially, has always maintained that he hoped not to have to use that power. But while the shares of both companies lost value and the cost of increased fundraising, some in the Treasury began to put pressure on Paulson to intervene quickly.
Then, last week, Morgan Stanley advisers hired by the Treasury to study the books of the two companies reached a disturbing conclusion: Freddie Mac has less capital of what was thought, according to people with inside information. The company took a decision which, although not necessarily been a breach of accounting standards, had a devastating effect on capital and financial stability of the company.
A person who was briefed on the financial position of the company, said that Freddie Mac had taken decisions that left certain accounting losses to future deficits and postponed until the fourth quarter of this year, something that was not revealed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according people familiar with the matter.
Representatives of both companies did not return calls seeking comment or simply declined to discuss the issue.
But the two companies have the option to challenge the intervention and request a judicial review.
The allegations of questionable accounting practices are nothing new in any of the two companies. Earlier this decade, the two paid heavy fines and dismissed its top executives after accounting scandals.
The chairman and chief executive Freddie, Richard F. Syron, joined the company in 2003 after executives earlier revealed that they had inflated earnings by more than $ 5000 million. The following year, Fannie Mae chief executive, Daniel H. Mudd was promoted to charge higher after the company was accused of accounting errors totaling $ 6300 million. People familiar with the plan for the Treasury said that both executives and others will be dismissed.
