If they go belly up, we all will have to pony up
WASHINGTON - Now that the federal government has thrown a lifeline to mortgage giants Fannie Mae and Freddie Mac, taxpayers could be on the hook for billions more if the crisis of confidence spreads.
There were encouraging signs yesterday for the rescue plan, but also signs of concern - notably on Wall Street, where shares of the two companies slumped further - that the plan won't be enough.
Some critics said they fear the Fannie-Freddie rescue effort will make more bailouts inevitable by sending a message that some institutions are too big to fail and thus encouraging risky behavior.
"It sends the wrong message to the world," said Joshua Rosner, managing director of research firm Graham, Fisher & Co. in New York.
Sung Won Sohn, an economics professor at The Smith School of Business at Cal State Channel Islands, cited soaring oil costs, a weakening economy, and an unstable housing market that he said will only get worse.
"I don't think these steps are enough to arrest the deterioration," he said.
As long as more homeowners default on mortgages, losses to financial institutions will mount. Those losses already exceed $400 billion, and some analysts say they will top $1 trillion before the carnage is over.
By comparison, Congress has authorized $650 billion so far to fight the Iraq war.
The Bush administration and the Federal Reserve disclosed an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages - almost half the nation's total.
The plan would temporarily increase a longstanding Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate.
The Fed also said it would allow Fannie and Freddie to get loans directly from the Fed - a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.
House Financial Services Committee chairman Barney Frank, a Massachusetts Democrat, predicted Congress would grant approval for the extended line of credit as part of a broader housing measure that he believes President Bush could sign by the end of next week.
Right now, the Treasury can extend up to $2.25 billion in loans each to Fannie and Freddie. Officials refused to discuss what the new limit might be but dismissed one report of a $300 billion limit as too high.
Treasury officials also said directly buying Fannie and Freddie stock would be a last resort.
Substantial sums are involved in any event. Analysts say the economic risks of doing nothing are just too great.
