Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.
“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole, 71, who left the Fed in March, said in an interview.
“At some point we’re going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,” Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television. “We’re getting to that point where a decision has to be made by Washington.”
Poole is “a long-time critic,” said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac.
“Freddie Mac is doing exactly what Congress intended when it chartered the company and, more recently, when it passed the Economic Stimulus Act,” McHale said. “We are well capitalized and positioned to continue to serve our vital housing mission.”
While leading the St. Louis Fed, Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and said the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters.
“I worry about those institutions,” retired Richmond Fed President Alfred Broaddus said. “They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don’t know how you do it other than extend money and the public takes the loss.”
The companies have about $80 billion of regulatory capital supporting $5.2 trillion of mortgages.
I agree with Poole. There is absolute no reason taxpayers should be on the hook for Fannie and Freddie losses. I have agreed with Poole on other occasions as well.
Please consider commentary in Poole, Paulson, Bernanke on Bailouts and Bank Failures regarding Poole’s statement “I am more skeptical of the financial strength of the GSEs, and believe that we could see substantial problems in that sector.“
Capital vs. Liquidity
Inquiring minds will also wish to consider Poole’s position on liquidity vs. capital in No Helicopter Drop For Failed Banks in which Poole addresses the question “Can the Fed Provide Capital to the GSEs?“
Long Time Critics
Sharon McHale, a spokeswoman for Freddie Mac counters with “Poole is a long-time critic”.
Excuse me but Poole has been Long Time Correct. Fannie and Freddie are going to have to raise capital in spite of the ridiculous assertions otherwise.
For more on capital raising efforts please see We’re All Homeowners Now, Nationalization of Fannie, Freddie Unavoidable.
Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List