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 since the government seized them.
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 is required to report its quarterly earnings.
The prospect of growing assistance underscores how the government is being sucked ever deeper into supporting financial firms with taxpayer money as the worsening financial crisis continues to erode companies that federal officials have vowed are too important to fail.
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.
“This number is unrelated to the Treasury’s analysis of the current financial conditions,” the Treasury said at the time, suggesting 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, and the economy has been shrinking, staggering the ability of borrowers to make mortgage payments that are at the heart of the firms’ business.
“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 as Fannie Mae 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 for Fannie Mae and Freddie Mac. Not only do the 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.
“You’re taking . . . a large buyer out of the market,” said Moshe Orenbuch, an analyst at Credit Suisse.
For his part, Paulson said the losses at Fannie Mae this week were in the “range of what we expected and further confirms the need for our strong actions.”
