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US government not expected to help more companies

(Agencies)
Updated: 2008-07-14 15:22

NEW YORK - The US 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.

In this Thursday, July 10, 2008 picture, US Treasury Secretary Henry Paulson testifies on Capitol Hill in Washington before the House Financial Services Committee hearing on systemic risk and the financial markets. [Agencies]

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 - unlike Bear Stearns Cos., whose buyout the government helped orchestrate in March. That is bound to unnerve an already turbulent Wall Street and make investors even more anxious as they await financial companies' earnings expected to be down a stunning 69 percent from a year ago when all the numbers are in.

Special coverage: Subprime Crisis Aftermath Related readings:  Fannie Mae posts $2.19b Q1 net loss  US economy 'in worst shape since World War II'  US spells out Fannie-Freddie backstop plan  JPMorgan to buy Bear Stearns for $2 a share

And, for consumers already squeezed by tightening credit standards, it could mean getting a mortgage will become even harder.

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 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.

Meanwhile, the Federal Reserve said it will provide additional loans if needed.

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."

Worries about financial companies failing intensified after a run on IndyMac Bancorp Inc. led to the bank's takeover by the government on Friday. It wasn't the Treasury or Fed helping to keep IndyMac in business, but a transfer of control to the Federal Deposit Insurance Corp. - which backs deposits on all the nation's banks.

Analysts said these kind of failures will curtail competition among financial institutions, which might in turn make it even harder for some borrowers to get mortgages, personal or auto loans or credit cards.

On Wall Street, Monday could be a critical day, with investors quite nervous amid the uncertainty in the financial sector. Friday, as investors tried to assess the health of the mortgage financiers, the Dow Jones industrial average dropped below 11,000 for the first time in nearly two years, and the overall market was left with its fourth straight weekly loss. The government's support of Fannie and Freddie in part was meant to assuage investors around the world.

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