Borrowing costs climbed and the companies' shares collapsed after analysts at New York-based Lehman Brothers Holdings Inc. said in a July 7 report that proposed accounting changes might force Fannie Mae and McLean, Virginia-based Freddie Mac to raise a combined $75 billion in capital.
Fannie tumbled 45 percent to $10.25 in New York Stock Exchange trading that week, while Freddie fell 47 percent to $7.75. A year ago both companies traded above $60.
At the height of the panic, Mudd dispatched two lieutenants to Asia to meet with debt investors. He declined to say which countries were visited, or the names of the officials.
`Extremely Worrisome'
Freddie and Fannie rely on foreign institutions. Investors and central banks outside the U.S. own about $1.3 trillion of Fannie and Freddie's corporate and mortgage bonds, according to the Treasury. Chinese institutions are the biggest holders in Asia. European investors own $300 billion of the securities.
"If they stop buying the agency debt, then yields would increase," Ajay Rajadhyaksha, the head of U.S. fixed-income strategy at Barclays Capital in New York, said in reference to Asia investors. "The costs would get passed to the consumers."
The average rate on a 30-year mortgage jumped to 6.59 percent on July 18 from 6.22 percent on July 11 as demand for the companies' debt waned, he said. If Asia started selling Fannie and Freddie holdings, "that would be extremely worrisome," Rajadhyaksha said.
Like when it announced the bailout of Bear Stearns Cos. by JPMorgan Chase & Co. on a Sunday in March, the Treasury rushed to pull together a statement on July 13 before markets opened in Tokyo.
Seen the Movie
Paulson, the 62-year-old former CEO of Goldman Sachs Group Inc., "knows the markets; he's seen parts of this movie before," Mudd said. The decision to allow Fannie and Freddie to borrow from the Fed's so-called discount window was meant to "send a message to the markets that it wasn't just a someday aspiration, but those confidence building measures are in place right now before Tokyo opens on Sunday night," he said.
Freddie CEO Richard Syron, 64, declined to comment.
Fannie was created as part of Franklin D. Roosevelt's New Deal in the 1930s, a time when the U.S. economy was struggling to emerge from the stock market crash, industrial production had tumbled 50 percent and the unemployment rate rose as high as 30 percent. Freddie started in 1970, when the economy was strained by the Vietnam War.
Both have the implicit guarantee of the U.S. government, so they can borrow at lower rates than banks and make money by purchasing higher-yielding mortgages from home lenders, providing new capital for loans. The companies own or guarantee almost half the $12 trillion of residential mortgages outstanding.
