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Fannie, Freddie Ratings Lowered To Near Junk Status

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The Associated Press

Published: August 23, 2008

NEW YORK - Freddie Mac talked to investors this week about possibly buying its stock to raise much-needed capital but billionaire investor Warren Buffett said he passed on an opportunity to help the troubled mortgage giant.

The likelihood Freddie will find willing investors took another hit after Moody's Investors Service lowered the company's preferred stock ratings and those of its sister company Fannie Mae to near junk status.

Shares of the government-sponsored enterprises tumbled in midday trading.

Freddie spokesman Douglas Duvall confirmed Friday that the company's management has been in talks with potential investors this week as part of ongoing discussions to raise capital. He declined to give details about the meetings, possible investors or structures. The Wall Street Journal reported on the talks Friday.

Freddie promised in May to raise $5.5 billion to shore up its finances, but hasn't done so yet and its declining share price makes raising that money far less feasible.
Fannie Mae spokeswoman Amy Bonitatibus declined to comment on whether the company is pursuing similar talks.
Warren Buffett acknowledged during a live appearance on CNBC Friday that he had been approached by Freddie and Fannie and passed on getting involved.

Buffett's company Berkshire Hathaway Inc. was the largest Freddie shareholder around 2000 and 2001, he said. The company sold its shares after Buffett realized that both companies were trying "to report quarterly earnings to please Wall Street."

Buffett said he thinks the federal government will have to step in because the pair's troubles seem to be growing. Losses between April and June for the two totaled $3.1 billion as defaults mount. The pair hold about half of outstanding U.S. mortgage debt and are the largest source of funding for home loans.

"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.

Investors appear to think existing common stockholders would get nothing if there is a government bailout, a view Buffett shares. 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.

On Friday, Moody's cut its ratings on the companies' preferred stock five notches to "Baa3" from "A1." A rating of "Baa3" is one notch above junk status. It also put them on review for possible downgrade, saying they each have limited ability to raise equity. The ratings agency thinks the likelihood of government intervention has risen.

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

Freddie Mac shares were down 35 cents to $2.81; Fannie Mae was up 15 cents to $5.

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