News of a government plan to rescue Fannie Mae and Freddie Mac helped their stock prices shoot up Monday morning. At the end of the day, though, the companies' stocks both closed down more than 5 percent.
Still, bidders showed signs of new enthusiasm in a $3 billion auction of securities by Freddie Mac.
Both the Treasury Department and the Federal Reserve announced they would take a series of steps to make capital available to Fannie Mae and Freddie Mac. For instance, they'll let the companies borrow from the Fed's discount lending window, and they'll raise their lines of credit. The measures are designed to show nervous investors that the companies have access to all the cash they need to operate.
Rep. Barney Frank (D-MA), who chairs the House Financial Services Committee, spoke Monday on CNBC: "What the secretary of the Treasury has proposed is reasonable. It's a kind of reassurance to people that help will be there, even though we don't feel it will be needed."
The health of Fannie Mae and Freddie Mac is considered vital to the mortgage business. The companies are in the business of buying mortgages from banks. If they can't do that, banks will become even more reluctant to lend money for new homes than they are now. And getting a mortgage will become even harder than it is now. Whether the federal rescue plan will go far enough to satisfy investors is an open question.
Brian Bethune, chief U.S. economist at the research firm Global Insight, says Congress has to work out a lot of details, like just how much money the Treasury Department is ready to pour into the companies.
"It has to be significant. This is not a nickel and dime issue," says Bethune. "It's an issue of significant billions of dollars that needs to be infused to backstop these organizations."
He says the uncertainty about the plan may be one big reason the companies' stocks fell Monday.
James Paulsen, chief investment strategist at Wells Capital Management, says Congress needs to wrestle with the question of just what kind of companies these are. They are mandated by the government to make mortgage money available to as many homeowners as possible. But they are also publicly traded companies with shareholders, who expect them to lend wisely and keep an eye on the profits they earn. Paulsen notes that a lot of mortgage lenders aren't lending much at all right now.
"If Freddie or Fannie were totally private, they'd probably be doing the same thing. But because of their quasi-public nature, that's just exactly what we don't want right now from a public standpoint," says Paulsen. "From the social good, we want them to continue to make mortgage funds available to qualified buyers."
Beyond that, Bethune says Congress, the Fed and the Bush administration need to do more big-picture thinking about the financial system and why the companies got in trouble in the first place. He says that since this financial crisis began a year ago, officials have fallen into a pattern: They deny that problems exist and then rush in with emergency bailouts when denials don't work any longer.
"We're kind of just operating like a fire department, and when the next crisis erupts, we'll try and deal with it," he says.
Last night's bailout was designed to stem the problems that Fannie Mae and Freddie Mac face — at least on a temporary basis. If the companies are going to survive long-term, it will be up to Congress to try to figure out how they can do that.