Rescue plan falls flat
American mortgage giant Freddie Mac passed its first test of investor confidence yesterday as buyers flocked to its $3bn (£1.5bn) sale of securities just hours after the US government announced sweeping measures to prop-up the country’s largest mortgage finance companies.
However, shares in Freddie Mac and its sister company Fannie Mae, which together own or guarantee half, around $5 trillion, of all American home loans, fluctuated wildly during trading yesterday as investors remained wary.
Shares in both Freddie Mac and Fannie Mae traded up as much as 25 per cent but later fell into negative territory during the volatile session, finishing down 8 per cent and 5 per cent respectively by the close of trading on Wall Street.
Under the rescue plan, the Treasury agreed to raise Fannie’s and Freddie’s credit lines above the existing $2.25bn a piece and buy shares to strengthen their finances if needed. The Federal Reserve said it would give them access to emergency funds.
Brian Bethune, chief US financial economist at economics research firm Global Insight, said the Treasury will need to specify within days how much capital that it intends to inject. “This capital infusion needs to be very significant – perhaps as much as $20bn, or higher, for both entities – in order to defuse the speculative selling.”