Big hole

22 August 2008 By Richard Beales Follow @richardbeales1

Feeble regulators have allowed US mortgage giants Fannie and Freddie to get by with minimal capital. If Treasury secretary Paulson wants them to be as strong as real privatesector banks so he can break them up and sell them off, he may have to inject some $200bn or more.

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Fannie Mae and Freddie Mac, "in [a] practical sense as institutions, they don't have any net worth", Warren Buffett, chairman of Berkshire Hathaway, told CNBC.

Both US governmentsponsored enterprises currently meet their regulatory minimum capital requirements. However, regulated US banks are required to hold more capital against exposures, and they tend to exceed the requirements.

Banks like Citigroup, JPMorgan and Bank of America tend to have offbalance sheet obligations that are less large, in proportion to their balance sheets, than Fannie and Freddie's. Asset types also differ, making comparisons difficult. The banks' assets are more diverse, but the GSEs' are arguably safer as they consist of mortgage exposures that, at least until a few years ago, had a safe track record.

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