Mike J. Gold
The long anticipated move by the Federal government to take over the Financial insitutions of Fannie Mae and Freddie Mac in order to get a handle on the mortgage crisis has finally occurred.
The world's large investment banks generally see this as a good thing.
Many experts are expressing confidence that the take over will help stabilize the mortgage industry, believing that the government's decision lifts a cloud of doubt from the indutry.
Many cautious investors will wait until the market actually bottoms out and the goveernemnt decides how to help protect home owners in the future beffore they have the confidence to daive back into the stock market.
Stock markets around the globe have been extremely volatile and directionless lately. The Dow Jones industrial average is still above its mid-July lows, but remains down more than 20 percent from the record it reached last October.
Companies have struggled as credit has gotten more expensive — or impossible to obtain. Chrysler Financial, for example, was recently only able to renew $24 billion of its $30 billion in credit lines, while the clothing retailer Steve & Barry's LLC blamed its inability to borrow money as it sought bankruptcy court protection in July.
A big reason for the volatility had been the uncertainty over the fate of Fannie Mae and Freddie Mac, which the U.S. Treasury placed into a conservatorship.
The bailout itself does have its negatives — notably, diluting Fannie's and Freddie's common and preferred shares to near-worthless levels.
However, those securities have plummeted so much over the past year that holders have already seen the bulk of their losses. Moreover, the FDIC's Bair pointed out that only a few small institutions have significant exposure to Fannie and Freddie's stock, and that regulators will work closely with those banks to develop capital-restoration plans.
Questions remain about whether financial institutions are valuing their debt-related assets correctly, according to Westwood Capital's Alpert.
But the government's decision to inject more money into the debt market — a multi-trillion-dollar source of funding for the world's businesses — by buying Fannie and Freddie securities should help staunch bank's losses. Soaring mortgage defaults led to a seize-up last summer in the debt market that has only worsened as home prices have continued to fall. The credit crisis has caused the financial industry to write down the value of its assets by more than $300 billion, and lose hundreds of billions of dollars more in actual credit losses.