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.
Raising additional capital here is a tricky issue. Existing equity holders have been decimated, and infusions are going to cut them off at the knees. They’d like their knees. But new money is a foregone conclusion if bondholders are to continue getting paid. Plus, the equity holders would have to walk in a restructuring situation, but at the same time the right side of the balance sheet is byzantine – there would be more classes of creditors than you could waggle a telephone pole at.
These are GSEs – sovereign wealth funds will not be stepping up to the plate; the Fed, maybe with the cooperation of money center banks, will most certainly be taking some action, and soon.
UPDATE: You have to step back a few years to find Fortunes’ blow by blow on the GSEs (around accounting scandal time). Good stuff, and well worth the read. I’m guessing nobody read it back then.