The U.S. government is signaling it won't throw a lifeline to struggling financial companies — except for mortgage linchpins Fannie...
NEW YORK — The U.S. government is signaling it won’t throw a lifeline to struggling financial companies — except for mortgage linchpins Fannie Mae and Freddie Mac — marking a shift to a new and potentially more volatile phase of the credit crisis.
Such an approach could mean beaten-down investment banks like Lehman Brothers Holdings Inc. and regional banks must now fend for themselves as they try to recover from billions of dollars in mortgage-related losses. That is bound to unnerve Wall Street, already anxious as it awaits financial companies’ earnings reports that are expected to be down a stunning 69 percent from a year ago when all the numbers are in.
The short-term uncertainty about Freddie Mac and Fannie Mae — which together hold or guarantee half the nation’s mortgage debt — was to an extent relieved on Sunday. Federal officials again threw their support behind the government-sponsored enterprises; the Treasury pledged to expand its current line of credit to the two companies and the Federal Reserve said it will provide additional loans if needed.
Treasury Secretary Henry Paulson also said the government could, if needed, buy equity capital in the companies, whose stocks lost half their value last week. The Treasury’s moves would require congressional approval.
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But, some of Wall Street’s biggest investors believe there was another message in the government’s announcement — the rest of the financial sector seems unlikely to get a helping hand. Global banks and brokerages have already written down nearly $300 billion in soured mortgage investments — a number projected to ultimately reach $1 trillion.
“The credit crisis has obviously entered into a new phase — the government has one bailout left in them, and this is it,” said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which invests $160 billion.
“One consequence of Freddie and Fannie is that other firms are allowed to go under,” he said. “If you couldn’t get your act together after four months of unprecedented financing terms, maybe you don’t deserve to be thrown yet another lifeline.”
The banking industry was dealt a severe blow in March when Bear Stearns Cos. nearly collapsed amid the evaporation of its liquidity. JPMorgan Chase & Co. stepped in to purchase Bear Stearns in a deal orchestrated by the Federal Reserve.
Bear Stearns was unhinged by mounting losses tied to investments in bonds backed by mortgages. As the mortgages increasingly defaulted, the value of bonds backed by the troubled loans tumbled.
Financial companies’ reports of writedowns of troubled debt are likely to increase this week as some of the country’s largest institutions, including JPMorgan Chase, Merrill Lynch & Co. and Citigroup Inc., report second-quarter results. That trio has already taken a combined $73 billion in write-downs since the credit crisis began last summer.