Fannie, Freddie bailout may imperil budget and dollar
NEW YORK — Fannie Mae and Freddie Mac’s rapid slide into the center of the global financial crisis
has Wall Street frantically talking about a possible government takeover of the government-sponsored mortgage agencies. But many also worry that a bailout of the GSEs would be so costly that it would cripple the budget and threaten an already badly bruised U.S. currency.
“A perception that the U.S. is no longer a safe haven for capital could produce tremendous strain on the dollar, as would fears of ballooning Treasury commitments associated with a bailout,” said James Hamilton, economics professor at the University of California, San Diego.
Together, Fannie and Freddie control nearly half the U.S. mortgage market. The slide in the companies’ publicly traded shares has been staggering. Fannie Mae’s stock has lost most of its value, swooning from peaks around US$70 in August of last year to their current US$9.
Freddie has fared even worse. Its shares fell Friday morning to the price of a gallon of gasoline. Things have become so dire that according to a report in the New York Times, senior Bush administration officials are considering a full-on government takeover. Treasury Secretary Henry Paulson played down that prospect on Friday, but markets took little comfort in his comments, and the situation remained fluid enough that many are still counting on an eventual bailout.
Such a bold step, unprecedented in scale, would not come without risks. For one thing, the absorption of Fannie and Freddie’s liabilities would effectively double the public debt, leaving it at a hefty 65 percent of the gross domestic product. This could lead to another bout of dollar selling, analysts say, putting an end to the currency’s relative calm over the past quarter.
“What is at stake here? The dollar,” said Michael Cheah, senior portfolio manager at SunAmerica Asset Management in Jersey City.
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