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US government not expected to help more companies

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

Wall Street will get a better sense of how concerned investors are with Fannie Mae and Freddie Mac's future immediately Monday morning. Freddie Mac is scheduled to hold its weekly debt auction beginning at 8 am EDT. The auction closes at 9:45 am, shortly after US markets open.

Successful completion of the debt auctions allows both lenders to remain liquid - replacing old debt with new. Liquidity has been one of the key questions facing financial companies during the credit crisis.

Special coverage: Subprime Crisis Aftermath Related readings:  Fannie Mae posts $2.19b Q1 netloss  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

Freddie Mac is auctioning off a combined $3 billion in three- and six-month securities. Wall Street will be looking very closely at the number of bidders and the rate at which the securities are auctioned, said Bert Ely, a banking consultant who has been critical of the companies in the past.

"I'll be surprised if the results aren't strong," he said, noting the government was likely heavily encouraging investors throughout the weekend.

The banking industry was already dealt a severe blow in March when Bear Stearns 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. After Bear collapsed, investment banks were given the opportunity to borrow directly from the Fed, an option that was previously only granted to retail banks.

Financial companies' reports of write-downs 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.

Lehman Brothers, whose shares have lost 78 percent since this year's peak in February, is considered to be on the shakiest ground because it is the smallest Wall Street bank and has significant mortgage holdings. Last month, the investment bank announced it lost nearly $3 billion during the second quarter and was forced to offset that by raising $6 billion of fresh capital.

Meanwhile, analysts believe regional banks in areas hardest hit by the real estate downturn are also at risk for failure. Some of the most bandied about names include Washington Mutual Inc., National City Corp, and Fifth Third Bancorp.

"Fannie and Freddie are too big to fail only because of the repercussions, not to just the mortgage and housing markets but the entire financial market," said Joe Balestrino, fixed-income market strategist at Federated Investors. "The US is in disarray ... these regionals could be gone, they are in a tough spot with housing and employment going south."

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