August 26, 2008 / 4:57 PM / 11 years ago

Goldman sees options before Fannie, Freddie takeover

WASHINGTON (Reuters) - The U.S. Treasury Department could take several steps to buttress Fannie Mae and Freddie Mac before taking direct take control of the mortgage finance companies, according to a report released by Goldman Sachs on Tuesday.

Last month, the Treasury agreed to lend the companies money or give them a capital injection if either were to face collapse, and Wall Street has lately shunned the companies for fear that such a bailout would damage existing shareholders.

In a research note that outlined several scenarios for government aid, Goldman Sachs stated that an aggressive government intervention was a last option.

If either company’s capital were to dip below its required level, the report states that it “would put more pressure on the Treasury to explicitly back the liabilities of the GSEs.”

Still, the report states, “the Treasury would opt for one of the earlier options to avoid such an outcome.”

Common shares of the government-sponsored enterprises have sunk in recent days and even their relatively safe preferred shares have lost value as investors have turned their backs on Fannie Mae and Freddie Mac.

The Goldman report states that the Treasury might stand aside and hope that companies find their own footing. If the Treasury does intervene, it might first choose to ease capital demands on the two companies since many investors fret that Fannie Mae and Freddie Mac are bound to dip below the capital levels set by regulators.

If Treasury deems that the situation is worsening, it might either buy mortgage securities from the GSEs or directly inject capital.

While any government intervention would likely cost the taxpayer money, the Goldman report states that any scenario for intervention “would be an entirely management event in the context of the federal budget.”

Reporting by Patrick Rucker, Editing by Chizu Nomiyama

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