11th
Wall St brokers face Fannie, Freddie worries - Reuters
The problem with the financial sector is that all of these characters have been swimming around in the same septic pond for so long that they are all contaminated by the sewage that is the mortgage/credit crisis. Virtually none of these institutions is free of the muck and the stench, and to make matters worse they are entangled and intertwined, so than when one drowns, inevitably, they drag some of the rest down to the depths with them.
Worries that the government may nationalize struggling mortgage finance giants Fannie Mae and Freddie Mac created yet another source of problems for beleaguered U.S. banks and brokers.
Fannie and Freddie, which purchase loans from banks and mortgage companies, together own or guarantee $5 trillion of debt, about half of all U.S. mortgages. These U.S. government-sponsored enterprises (GSEs) also loom large on the balance sheets of the country’s financial institutions.
“GSE exposures create another area of likely write-downs,” said Fox-Pitt, Kelton analyst David Trone.
Trone in a research note estimates that JPMorgan Chase’s total exposure — holdings of GSE debt, mortgage-backed securities and counterparty risk — is $87 billion, or 69 percent of its equity.
Citigroup has exposure of $51 billion, or 40 percent, while Goldman Sachs has the largest total exposure among investment banks at $14.2 billion, or 32 percent of equity.
In addition, GSE bonds and mortgage securities generate underwriting and trading business that have fueled Wall Street profits for years.
“Freddie is insolvent and Fannie is running on fumes. They’re going to end up being nationalized,” said Len Blum, a mortgage markets veteran and partner at investment bank Westwood Capital. “The entire financial web depends on them. If they failed, it would make Bear Stearns look like a picnic
