Analysts split on Fannie-Freddie rescue plan

By Sweta Singh and Neha Singh

BANGALORE (Reuters) - Analysts were divided on the U.S. government's rescue plan for mortgage giants Fannie Mae and Freddie Mac, but they agreed the companies were under no pressure to raise immediate capital.

Merrill Lynch called the rescue plan a "double-edge sword," while Fox-Pitt said it was the "best of all possible outcomes" for shareholders.

Citigroup said it did not believe there was any real risk of a government takeover of Fannie and Freddie any time soon.

Merrill analysts said, "The mere possibility of direct investments in Fannie and Freddie suggests further caution, in our view, as the pieces are falling into place for institutional support at possible shareholder expense."

Goldman Sachs said the actions by U.S. regulators were needed in order to stem the risk of credit deterioration.

"If Fannie Mae and Freddie Mac were shrinking it would be hard to avoid this (credit contraction) situation," Goldman analysts wrote.

The U.S. Treasury Department and Federal Reserve on Sunday announced measures to lend money and buy shares if necessary in the two embattled mortgage lenders.

Shares of both companies soared in early trade, buoyed by the rescue plan, but quickly gave up most their gains and traded lower.

CAPITAL CHECK

Freddie and Fannie shares had plummeted more than 40 percent last week on fears the companies were undercapitalized and would require billions of dollars in additional capital.

However, analysts believe both companies are adequately capitalized, at least in the near term.

"Credit losses are likely to lead to capital erosion at both companies, however, each appears sufficiently capitalized for the next few quarters," Merrill's Kenneth Bruce said.

Analysts at Citigroup and Fox-Pitt also said there was no urgent need for new capital, with Fox-Pitt's Howard Shapiro adding "insolvency was never an issue."

The companies, which are shareholder-owned but also government-sponsored, had said they were adequately capitalized.

Since the crisis began, Fannie and Freddie have lost more than $11 billion and raised some $20 billion of capital.