Last year, and earlier this year, sovereign wealth funds were flocking to make investments in banks needing capital. But now, many have lost a bundle on those deals and are not inclined to be burned again.
Private investment capital that could be going to shore up balance sheets is being diverted to hard assets like the Chrysler building, which just attracted an $800 million investment from Abu Dhabi Investment Council.
Warren Buffett has yet to ride to the rescue, having learned his lesson from Salomon Brothers two decades ago and sworn off more Wall Street investments.
With no influential names jumping in with big-stake purchases, the Federal Reserve might have to step up again to support the financial system.
One big concern is Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), the two government-sponsored entities that are the engines of the mortgage market. The two might have to raise $75 billion in new capital, after having already raised $20 billion this year, and that realization has sparked near-panic as investors try to beat each other to the door. There is talk about the government taking them over.
Late Friday, headlines hit that the two were eligible for access to the Federal Reserve's discount window, sending their stocks ricocheting skyward.
Offloading assets onto the Fed could help Fannie and Freddie work down their leverage--the culprit behind the credit crisis--but it's not the only answer. The Fed's available pool of Treasury securities for lending through its window is just $900 billion, compared to more than $1.5 trillion of direct debt at Fannie and Freddie combined. And investment banks have had access to the window since Bear Stearns imploded in March, further limiting the potential securities for loan.
The Fed and the U.S. Treasury have tried to walk a tightrope on the issue of government intervention when a firm is faltering, saying they want to avoid a moral hazard but limit the damage to the broader economy that would happen with the failure of a major financial firm.
Instead the Fed has been urging financial companies to raise capital to guard against a cash squeeze that did in Bear Stearns this year. Asset sales and dividend cuts are emerging as the more palatable option in the absence of a rush of investors.
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FORBES:
http://www.forbes.com/business/2008/07/11/fannie-freddie-fed-biz-wall-cx_lm_0711loans.html