WASHINGTON — The first of the Bush administration’s major financial takeovers is poised to get more expensive as mounting troubles in the credit and housing markets have further undermined the health of Fannie Mae and Freddie Mac.
The Treasury Department is likely to be required to pump billions of dollars into the mortgage giants — and the tab, some analysts say, could exceed the government’s worst-case scenario, requiring more than the $200 billion the government set aside for capital infusions into the two companies.
While not a cent has been spent, the first injection of cash could come as soon as today, when Freddie Mac must report its quarterly earnings.
Under the government’s agreement with the companies, the Treasury is required to inject money in any quarter when the companies’ liabilities exceed their assets, up to $100 billion for each firm.
When the Treasury seized the firms, it said it had chosen the figures primarily to reassure investors who had been fleeing the companies, with the suggestion that there was no expectation the government was going to spend this amount.
Since then, the financial crisis has deepened, making it even more difficult for the companies to finance their debt.
“Depending on what happens with housing, you could see scenarios where the $100 billion comes into the question,” said Rajiv Setia, an analyst with Barclays Capital. He said McLean, Va.-based Freddie Mac may need $40 billion by the end of the year.
On Monday, Washington, D.C.-based Fannie Mae reported a whopping $29 billion loss, bringing it close to triggering a government cash injection. Most of that loss was because the company wrote down the value of tax credits it is unlikely to use.
Many analysts consider Freddie Mac to be in worse financial shape and, if it makes the same decision regarding tax credits, would report today that it owes billions more in obligations than it has in assets, triggering a government injection of cash.
Moreover, the decision by Treasury Secretary Henry Paulson to abandon the plan to buy the troubled mortgage- related assets from banks and other financial firms poses a problem. Not only do the two companies lose the chance to sell any of these assets to the government, the announcement Wednesday that the program had been shelved caused the value of the assets to fall.
