the Bush administration has bailed out government-sponsored
enterprises (GSEs) Freddie Mac and Fannie Mae to ensure they can
meet their debts. In what may become the biggest ever
quasi-nationalisation, the US government argued the move would
provide market stability, support mortgage finance and protect
taxpayers.
The decision added $5.4 trillion onto the government books,
around 40 percent of the US gross domestic product (GDP), with the
Treasury initially setting aside $200 billion for potential losses
on assets, about 1.4 percent of GDP.
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Ratings agency Standard & Poor’s painted a gloomier picture,
suggesting the scale of taxpayer losses may be up to $325 billion
(about 6 percent of the GSE’s gross liabilities), but still less
than a third of the cost of the Japanese banking crisis of the
1990s.
While the markets perked up on 8 September – with the exception
of Fannie Mae and Freddie Mac shares, which fell in price by 89 and
83 percent, respectively – shareholder gloom returned to the
banking sector within 24 hours. In particular, a number of banks
announced writedowns due to the collapse in value of their Fannie
Mae and Freddie Mac held equity, notably Sovereign Bancorp, which
held around $600 million, and Wells Fargo, which said its $480
million holdings were trading at around 5 to 10 percent of par
value.
The question is whether the US Treasury has done enough to
stabilise the US banking market – or whether it has played its
trump card too early. Intense speculation remains around
Seattle-based Washington Mutual (WaMu) – the sixth-largest US
retail bank by branch number. Its shares have lost 90 percent of
their value in the past year, tumbling below $2 by 10 September,
amid concerns it may be forced to raise new capital to cover as
much as $19 billion in loan losses. WaMu has been a cause for
concern throughout the year as its asset quality has
deteriorated.
In a better-than-expected update on its third-quarter
performance published on 11 September, WaMu said expected
charge-off rates would climb – but, crucially, at a slower pace
than in prior periods. The bank marked down its Fannie Mae and
Freddie Mac stock holdings by 90 percent, recording a loss of $254
million.
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