August 23, 2008 in Business

Buffett predicts giants will survive

But Fannie, Freddie will need aid, he says
By J.W. ELPHINSTONE Associated Press
 

NEW YORK – Billionaire investor Warren Buffett said Friday he believes mortgage giants Fannie Mae and Freddie Mac are too big to fail, but shareholder equity in those companies could be wiped out.

During a live appearance on CNBC, Buffett predicted the federal government eventually will have to step in to help because the troubles of Fannie Mae and Freddie Mac seem to be growing.

“They’re looking for help, obviously. And the scale of help is such that I don’t think it can come from the private sector,” Buffett said.

Though the timing was not clear, Buffett acknowledged that he had been approached by the government-sponsored enterprises for help and passed on getting involved.

The Wall Street Journal reported Friday that Freddie Mac has been talking with private-equity firms and other investors about possibly buying common or preferred stock in the company. Calls to Freddie for comment weren’t immediately returned.

Freddie Mac promised in May to raise $5.5 billion to shore up its finances but hasn’t yet, and its declining share price makes raising that money far less feasible.

Fannie’s and Freddie’s shares have lost more than 90 percent of their value this year.

The two hold about half of outstanding U.S. mortgage debt and are the largest source of funding for home loans. But defaults in their portfolios are mounting. Losses between April and June for the two totaled $3.1 billion, and investors fear they will continue to grow.

Investors appear to believe existing common stockholders would get nothing if there is a government bailout. What remains unclear is whether investors in preferred shares – a type of investment that incorporates elements of both stocks and bonds – will also be wiped out.

Fannie shares rose 7 cents to $4.92 in midmorning trading and Freddie increased 2 cents to $3.18. Both shares earlier surged about 5 percent higher.

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