Businesses fail. Since when do only certain companies get the bailout option (see Future Uncertain for Fannie, Freddie)?
Over the past year, homeowners have increasingly defaulted on mortgages, which has led to billions of dollars in losses for the pair of government-sponsored enterprises. That trend has also been one of the leading culprits in the deterioration in credit markets that has made it more difficult for companies in general to raise new capital.
Freddie has said it is committed to raising $5.5 billion to help shore up its troubled balance sheet – that is nearly twice the size of Freddie's current market capitalization of about $2.84 billion.
Fannie's (FNM: 4.87, -1.14, -18.96%) market capitalization is about $6.58 billion. Friedman, Billings & Ramsey Co. analyst Paul Miller estimates Fannie needs to raise between $5 billion and $10 billion in new capital.
But the prospect of government help has been one of the greatest hang-ups in efforts to raise capital from other investors.
Fannie and Freddie could raise those funds through non-governmental investors, but the cost would likely be severe in terms of interest or dividend payouts depending on the structure of the capital raise and in terms of dilution to current shareholders, analysts said.
"The cost of capital of this nature is just staggering," said Ladenburg Thalmann Inc. analyst Richard Bove. Fannie and Freddie could likely raise capital, but it would cost them so much during the current downturn in the credit market that it is unattractive, Bove said.
The government didn't bail out Enron (which would have saved us all from the Senate's showboating masquerading as a trial). Companies go out of business every day. I always thought that grim potential was motivation enough for businesses to work at avoiding disaster.
In the above quoted article, notice how the potential of government bailout devalues the company. It's not because a massive safety net of tax dollars motivates companies to do their best to turn a profit. Look at Amtrak.
What makes Fannie and Freddie so special they can't make mistakes and learn from them? Investors know a sour deal when they see it and US government-based endeavors do not turn profits. If there was no bail out and investors did come to the rescue, there would be some changes to turn Fannie and Freddie around. Investors with that kind of capital do not like to lose money.
Popularity: 1% [?]
Unrest by Parkway Drive