There’s no rest for a Treasury Secretary in a financial meltdown, as Hank Paulson is discovering. Fannie Mae and Freddie Mac continue to bleed mortgage losses, and so the Treasury chief may soon have no choice but to pull the trigger on his new authority for taxpayers to recapitalize the mortgage giants. Fan and Fred shares took another header yesterday, in the wake of a Barron’s article predicting that a Treasury recap was “almost inevitable.” When a single story in one day can take nearly 22% off Fannie shares, and nearly 25% off Freddie’s, you know investors are scared to death.
They should be. Two weeks ago the companies added another $3.1 billion in losses to the $11 billion they’d already reported in recent quarters. Both companies slashed their dividends and warned they’d buy fewer mortgages, while being more selective about those they do buy. So much for the assertion — made so confidently this year by Barney Frank, Chris Dodd and Chuck Schumer — that Fan and Fred would rescue the mortgage market from the housing slump. Instead the companies have dug an even deeper hole than have many subprime lenders. Their current run of losses are based in so-called Alt-A loans, aka “liar loans,” that didn’t require enough proof of borrower net worth. More
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