Mortgage Giants, Freddie and Fannie Should Split, Not Get Aid

July 23 2008 - Freddie Mac and Fannie Mae should close down their business or split into private companies and not get government aid, investor Marc Faber said.

“They should close down Fannie Mae and Freddie Mac or what they should do is split them into 10 different companies and let them run as private companies,” said Faber, who forecast the so-called Black Monday crash in 1987, in an interview with Bloomberg Television from Chicago. “What Freddie Mac and Fannie Mae should right away do is not obtain any federal aid, but issue additional shares” to avoid using taxpayers’ money in a rescue plan, he said.

Fannie Mae and Freddie Mac, which own or guarantee about half of the $12 trillion of U.S. mortgages, have fallen 31 percent and 41 percent respectively this month, on concern the companies have insufficient capital to cover writedowns and losses amid the mortgage-market collapse.

U.S. lawmakers reached agreement on a rescue plan for Fannie Mae and Freddie Mac that the House may vote on today, Representative Barney Frank said. Under a modified version of proposals made by the Bush administration, the Treasury Department would gain authority to inject capital into the two largest U.S. mortgage finance companies, through loans and equity investments.

Fannie Mae gained $1.84 to $15.25 at 7:45 a.m. New York time, before the official open of U.S. exchanges. Freddie Mac added $1.80 to $11.50.

Colossal Bust

Faber said the “world may already be in recession,” and reiterated a prediction for a “bust” in global markets.

Markets may enter “a vicious cycle on the downside” whose worst scenario is a “colossal bust with inflation,” as central banks are unable to manage the economic slowdown and faster growth in prices.

Still, Faber forecast the Standard & Poor’s 500 Index may climb about 5.7 percent from current levels, to 1,350. Oil may drop $30 a barrel to “about” $100 in the near term, he said, although the “long-term” prospect for oil prices is to remain “tight.”

Stocks worldwide have tumbled this year, erasing about $11 trillion in value, as $467 billion in credit-related losses and accelerating inflation weigh on the outlook for economic and profit growth.

Freddie, Fannie Should Split, Not Get Aid, Faber Says
by Carol Massar and Alexis Xydias | Bloomberg