Executives at Fannie Mae and Freddie Mac, the American financial giants which sit at the core of the country's mortgage market, were desperately fighting yesterday to preserve their independence as a federal government takeover appeared closer than ever.
Shares in the companies collapsed to lows not seen for two decades amid fears that any government-led refinancing would wipe out shareholders. Freddie Mac bosses met US Treasury officials to complain that the uncertainty was crippling their ability to find a private market solution to their problems.
The companies own or guarantee almost half of all outstanding US mortgages and have become even more important props to the mortgage market since the appetite for exotic mortgage derivatives waned last year.
Last month, the Treasury Secretary, Hank Paulson, promised to do whatever it took to shore up the companies. Their failure could plunge the US housing market into a depression, and, because Fannie and Freddie debt is so widely held by foreign governments, it could also lead to a flight of capital from the US.
Mr Paulson has insisted that the promise to backstop the companies with emergency lending or the injection of equity capital ought to shore up confidence enough to ensure that the money is never needed. However, the companies' shares have been in freefall since reports on the weekend that the Treasury was drawing up a nationalisation plan, which it could put into effect within weeks.
On Tuesday, Freddie Mac had to pay its highest-ever interest rate relative to Treasuries, to obtain $3bn (£1.6bn) of short-term debt.
Yesterday, Fannie Mae shares lost 27 per cent of their remaining value. Freddie Mac shares shed 22 per cent.
Freddie Mac has promised to raise $5.5bn of new capital to strengthen its balance sheet, battered by billions of dollars of losses on US mortgage investments and by the falling value of its ultimate collateral, namely American houses.
In private, executives have expressed their fury that uncertainty over the Treasury's intentions has persisted, making it impossible to reassure potential investors they won't quickly be wiped out in a subsequent government takeover.
Fannie Mae's chief executive, Daniel Mudd, insisted yesterday that the company had more capital than ever before and did not foresee a government takeover. "They haven't offered anything and we haven't asked for anything.I don't anticipate that they will do that."
The Treasury has consistently said it has no plans to take action and said the meeting with Freddie Mac executives was routine.Reuse content