“First Prime Group”: Conjecture that the US Treasury was mounting a plan to rescue Freddie Mac and its sister company Fannie Mae has grown after a week in which the groups lost half of their stock market value on fears that they would be unable to continue raising money. Earlier in the week, comments made by former St.Louis Fed official William Poole in which he speculated they were effectively insolvent, prompted a sell-off in the shares of the beleaguered mortgage behemoth.
“The fresh turmoil for the US financial system comes at a time when both the US Treasury and the Federal Reserve have been making tough statements aimed at dispelling the notion that any financial institution is too big or too connected to fail” a source close to First Prime Group said.
US Treasury Secretary, Hank Paulson, is thought to be reluctant to sanction any package that could benefit shareholders in both companies in light of heightened concerns about “moral hazard”. Both Freddie and Fannie have suffered $11bn of losses in the past nine months and between them, guarantee some $5 trillion of US mortgages.
A rescue package would undoubtedly precipitate a market rebound, but any gains were likely to be short lived, the First Prime Group source speculated.
Any package could coincide with US banks, Citigroup and Merrill Lynch, revealing billions of dollars of further writedowns arising from the continuing credit crisis.
