Fannie Mae Roiled by Criticism, Called ‘Adequately Capitalized’ by Paulson

Is the other shoe in the ongoing financial crisis the failing solvency of Fannie Mae and Freddie Mac? Statements yesterday by long-standing Fannie Mae critic William Poole, former St. Louis Federal Reserve president, questioned the two companies’ solvency, and sent their share prices on a roller coaster ride. According to Poole, who is now a fellow at the Cato Institute, Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter of 2008, thus making it insolvent under fair value accounting rules. Moreover, the fair value of its assets fell 66 percent to $12.2 billion during the same quarter, and may be negative next quarter, he asserted during an interview, further adding that a government bailout of the organizations is now a distinct possibility. An article in the Wall Street Journal claimed this week that the US Treasury Department has been mulling what to do in case the two companies fail, but the Treasury Department hasn’t confirmed that it believes that Fannie Mae or Freddie Mac are on the verge of going belly up. Yesterday, jittery investors sold Fannie Mae shares, taking them down about 13 percent, or the lowest level since the last time there was a widespread real estate crisis, in the early 1990s. This morning, testifying before the House Financial Services Committee, Treasury Secretary Henry Paulson (pictured) again asserted the essential solvency of the two organizations. “Their regulator has made clear that they are adequately capitalized,” he said in prepared remarks to the committee. “Whatever troubles they suffer, it will hurt apartment investment sales more than the other commercial property types,” Robert Bach, senior vice president & chief economist of Grubb & Ellis Co., told CPN this afternoon. “But I assume Fannie and Freddie will get by like the investment banks, that is, by raising more capital.” Federal Reserve Chairman Ben Bernanke also testified before the committee, on issues largely dealing with his recent moves to expand the Fed’s regulatory authority over financial institutions. Even amid the turmoil, Fannie Mae has expanded its presence in the multi-family market, as reported yesterday by CPN. In an effort to meet the expanding demand for rental housing, the company is increasing its commitment to purchase small multi-family loans of up to $3 million, or $5 million in some markets. Also according to the company, it invested $20 billion in multi-family housing in the first half of 2008.