Fannie Mae and Freddie Mac has too much debt, could cost the USA its AAA credit rating
Posted on July 11th, 2008 by bile Tags: Andrea Cicione, Arlington, Bear Stearns Cos., BGCantor Market Data, BNP Paribas SA, credit rating, Fannie Mae, Federal Reserve System, Freddie Mac, London, New York, Senior Bush administration, Standard & Poor's, U.S. government, United States, USD, Virginia 2 Comments »The cost of protecting against losses on Treasuries rose to the highest in almost four months on speculation any financial support for mortgage lenders Fannie Mae and Freddie Mac may cost the U.S. government its AAA rating.
Credit-default swaps on Treasuries increased 4 basis points to 18, according to CMA Datavision prices at 2:30 p.m. in London. The 10-year contracts are near the record 19 basis points when the Federal Reserve backed the bailout of New York- based brokerage Bear Stearns Cos. on March 17.
Senior Bush administration officials are considering a government takeover of one or both mortgage lenders, according to a person familiar with the discussions. Fannie Mae and Freddie Mac have about $5.2 trillion in debt outstanding, exceeding the Treasury’s $4.6 trillion in notes. Standard & Poor’s said in April that possible support of government- sponsored lenders posed a threat to the government’s top rating.
“The ratings agencies said the risk for the U.S., if it bails out Fannie and Freddie, is it could lose its AAA rating,” said Andrea Cicione, a London-based credit strategist at BNP Paribas SA. “It is clearly a possibility, albeit a remote one.”
Investor speculation the government will provide support helped drive down the cost of default protection on the mortgage companies’ senior debt. Credit-default swaps on Fannie Mae dropped 17 basis points to 62 and contracts on Freddie Mac fell 23.5 to 55, according to CMA.
Treasuries fell the most in three weeks, increasing the yield on the benchmark two-year note by 8 basis points to 2.49 percent, according to bond broker BGCantor Market Data.
Shares in Washington-based Fannie Mae and Arlington, Virginia-based Freddie Mac tumbled for a third day on concern the firms don’t have enough capital to offset writedowns. Their failure would deepen a housing slump that already is the worst since the Great Depression.
The companies, which own or guarantee about half of the $12 trillion of U.S. mortgages, may be able to count on a federal lifeline because they are too big for the government to allow them to fail, leading Republican and Democratic lawmakers said.
This is what government intervention gets you. Sit back and enjoy it. You’re paying for it.
