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.
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.
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