The news was enough to force the US Government and Treasury secretary, Hank Paulson into a day of crisis meetings on Friday that culminated after markets had closed in selective briefings of media groups about the change of heart about the takeover and why it was happening. Fannie and Freddie are dead in their current form. The announcement Sunday, US time, kills them off, At the moment the US Government will control them for at least the next two years.
Fannie and Freddie shares dropped sharply in after hours trading on Friday after it became known that huge changes were coming. Wall Street staged a small recovery right at the close of trading as the news started percolating through the market. Fannie fell $US2.25, or 32% to $4.79 and Freddie slumped $US1.40, or 27% to $US3.70.
That left Fannie's market value at $US7.6 billion, down from $US38.9 billion at the end of 2007 and Freddie value was just $US3.3 billion, down from $US22 billion over the same period. The shares will be wiped out in the move, which is called a "conservatorship" and the value of the company's preferred shares is likely to be cut, but their value has already dropped sharply in the market as well.
Up to $US100 billion each will be made available to help support the two struggling giants. As well the US Treasury has extended a secured credit facility to the Federal Home Loan Banks, the government- chartered cooperatives, allowing them to borrow through the end of next year. There is around $US1.3 trillion of assets in these co-operatives.
The market value of Fannie's $US21.7 billion in preferred shares had fallen more than 60% to just $US7.87 billion at the end of August and the market value of Freddie's $US14.1 billion in preferreds had also fallen by more than 60%, this time to $US5.44 billion. It's the biggest bailout seen around the world.
The companies recorded $US14.9 billion in combined net, losses, reducing their capital reserves. Fannie has raised $US14.4 billion in new capital since last November and Freddie sold $US6 billion of preferreds and delayed the issue of a further $US5 billion. Fannie had $US47 billion of capital at June 30. The company is required by its regulator to hold $US37.5 billion. Freddie's capital stood at $US37.1 billion, compared with a requirement of $US34.5 billion.
That figure for Freddie is now thought to be wrong as it had been bolstered by questionable accounting moves that triggered the move to take them over on Friday. Fannie's figure has also been overstated, though not by as much as Freddie. The news came Friday, at the end of what was another miserable day for the US economy.
Unemployment lurched higher with the jobless rate hitting 6.1%, the highest for five years and another 84,000 jobs were lost, taking the total so far this year to over 600,000. As the news broke of the move on Fannie and Freddie, another, smaller report from the Federal Government was overshadowed. The 11th US bank to fail this year had just been closed in Nevada.
Silver State Bank was shut by regulators today. It had $US2 billion in assets, making it the largest of the last three banks to have been shut on successive Friday nights in America.
Another bank has taken it over and will re-open the 13 branches tonight, our time. In July, Silver State announced the resignation of a director named, Andrew McCain. McCain, who had served on the audit committee and was a director for five months, is the son of Republican presidential nominee John McCain, according to US reports over the weekend.
The main regulator, the Federal Deposit Insurance Corporation last week said 117 banks were classified as "problem'' in the second quarter, 30% higher than in the first quarter. None were named. U.S. regulators this year also closed Integrity Bank of Alpharetta, Georgia, Columbian Bank and Trust of Topeka, Kansas, and First Priority Bank of Bradenton, Florida, in August; Reno- based First National Bank of Nevada and Newport Beach, California-based First Heritage Bank in July; Staples, Minnesota-based First Integrity Bank and ANB Financial in Bentonville, Arkansas, in May; Hume Bank in Hume, Missouri, in March; and Douglass National Bank in Kansas City, Missouri, in January.
The closure is significant because Nevada is one of the states where the subprime mess is at its nastiest worst, where home owners are under the greatest pressure as foreclosures and loan arrears escalate. Employment is worsening because of the downturn in housing and construction and falling gambling revenues in Las Vegas and other gaming centres.
Figures out Friday from the Mortgage Bankers Association of the US showed that a record 1.2 million homes were in foreclosure during the June quarter of the year, and nearly three million others were behind in their payments. The number of house loans in foreclosure represents 2.8% of all outstanding loans, up from 1.4% of all loans during the same period a year ago.
And 490,000 of the 45 million home mortgages serviced by MBA members began new foreclosure proceedings. That's up 9% from the 448,000 starts recorded in the previous quarter, and marked the seventh straight quarter that foreclosure starts increased. The delinquency rate, which measures mortgages that aren't in foreclosure but have missed least one payment, also hit a record high with 2.9 million homeowners, or 6.4%, were behind on their payments, up more than 25% from last year.
The Association said increases in foreclosures in California and Florida overwhelmed improvements in states like Texas, Massachusetts and Maryland. California and Florida accounted for 39% of all foreclosures started during the quarter. Those two states as well as six others - Nevada, Arizona, Michigan, Rhode Island, Indiana, and Ohio - all had foreclosure start rates higher than the national average.
The unemployment rate rose to 6.1%, the highest level since September 2003. That's up from 5.7% in July and 4.7% in August of 2007. 84,000 jobs were lost in August, according to the US Labor Department, compared with a revised reading of a 60,000 jobs lost in July.
The US economy has lost 605,000 jobs so far this year, including an extra 58,000 included as the Department revises previous estimates. The jobless numbers will worsen as the year goes on: Analysts still forecast positive growth for the US this half, but that's open to question after these terrible jobless numbers. There's just nothing helping US consumers at the moment to cope with the pressures. Maybe the rescue of Fannie and Freddie will prove to be a circuit breaker for the economy generally.
