NEW YORK (Reuters) - A firestorm of anxiety over the ability of U.S. mortgage giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) to get the capital they need to survive sent their debt and stocks plummeting on Thursday.
Stoking concerns, former St. Louis Federal Reserve President William
Poole said the two major U.S. mortgage finance companies were
"insolvent" and may need a U.S. government bailout, according to
Bloomberg News.
The outlook was so dire that Bush administration officials were
meeting with regulators to discuss contingency plans should they be
unable to raise funds and support the worst housing market since the
Great Depression, according to a report in the Wall Street Journal.
Yield spread premiums for the larger Fannie Mae rose to the highest
since the days before the Federal Reserve's orchestrated bailout of
Bear Stearns Cos in March.
Shares in both companies plunged to their lowest since 1991.
The government-sponsored enterprises, or GSEs, are expected to need
billions of dollars in capital to support their balance sheets to try
to stabilize the mortgage market. They found strong demand as they
raised some $20 billion since last fall, but the instability in share
prices since raises doubts about new investor support.
"This is not an opportune time to have to increase liquidity with
the stocks down so much," said Alan Lancz, president of investment
advisory firm Alan B. Lancz & Associates in Toledo, Ohio. "These
dilutive deals these companies are putting together are just increasing
that downward spiral within the financials, not even to mention the
confidence in the whole system."
Mounting doubts over the ability of the companies led Deutsche Bank
analyst Mustafa Chowdhury, a former Freddie Mac executive, on a
Wednesday conference call to float the possibility that share prices
could go below $5.
For the debt, much depends on the continued support of foreign
central banks that have been loading up on the companies' $1.6 trillion
in outstanding debt, a Deutsche Bank trader said on the call.
"If you are going to bail out Bear Stearns, the Congress is going to
support Fannie and Freddie," said Andrew Brenner, co-head of structured
products at MF Global in New York.
Yields on 10-year bonds issued by Fannie Mae and Freddie Mac
ballooned 10 basis points to more than 1 percentage point above
government debt. They had been quoted as much as 12 basis points wider
than late Wednesday.
Five-year credit default swaps on Fannie Mae widened by about 5
basis points to nearly 82 basis points, or $82,000 a year to protect
$10 million of debt, while Freddie Mac's swaps widened by about 2 basis
points to about 82 basis points.
Poole's remarks intensified traders' fears about the financial soundness of Fannie Mae and Freddie Mac.
The mortgage-backed securities issued and guaranteed by the GSEs
were more insulated since payments on the issues flow directly from
homeowners to investors.
Early weakness in the "agency" debt market spilled into other parts
of the bond market. Interest rate swap spreads grew anywhere from 0.50
basis points to 1.50 basis points.
(Additional reporting by Richard Leong, Dena Aubin and Deborah Jian Lee; Editing by Tom Hals)
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