What fueled this latest crisis in confidence was a Barron's article last weekend that speculated the government's likelihood of a takeover is increasing, Peter Cohan, principal of the consulting firm Peter Cohan & Associates, tells GlobeSt.com. "That is definitely one of the reasons: the article said if Fannie and Freddie cannot raise the $10 billion each that they need, Treasury will take over it and sell off its bad loans. Shareholders will be left with nothing in that scenario."
According to public comments by Treasury Secretary Henry Paulson, no government takeover is planned. Fannie Mae and Freddie Mac did not return calls in time for deadline.
There are other signs of financial stress that worry investors, Cohan adds. "Freddie Mac tried to raise money this week and they had to pay a much higher spread than they have in the past." The agency raised $3 billion in five-year debt, but at 1.13 percentage points over the rate the federal government pays for comparable borrowing, he notes. Another worrisome sign: Asian investors only purchased a small percentage of Fannie Mae paper recently. A year ago, these investors purchased as much as two-thirds of it, according to Cohan. "What is happening is that they are having more trouble raising short-term financing."
These events follow very poor earnings performance from the GSEs for Q2. On Aug. 6, 2008, Freddie Mac reported a loss of $821 million loss, or $1.63 per share for Q2. Two days later, Fannie Mae reported a loss that took even wary Wall Street analysts by surprise, losing $2.3 billion, or $2.54 per share.
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