March 17, 2008 / 8:18 AM / 12 years ago

UPDATE 2-Friedman Billings: GSEs need to raise $20 bln each

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March 17 (Reuters) - Brokerage Friedman Billings Ramsey said U.S. government-sponsored enterprises (GSEs) would need to raise about $20 billion each to reverse de-leveraging trend, while the banking system would need $200 billion to $250 billion.

Friedman said it saw the financial system currently under-capitalized by roughly $1 trillion to $1.2 trillion.

The brokerage, in a note on financial strategy, said financial equities will continue experiencing a downward pressure until fresh capital comes into the system.

Investors should avoid owning the current common equity in most financial institutions as future capital raises would dilute current common shareholder equity, the brokerage added.

More significant dividend cuts will be necessary for the industry to build capital, Friedman said.

The capital needs for Freddie Mac FRE.N appear to be higher compared with that of Fannie Mae FNM.N, and this is due to the large losses Freddie Mac has booked in other comprehensive income, the brokerage said in a note to clients.

Friedman estimated that Freddie Mac would need an additional $13 billion to $15 billion in capital, while Fannie Mae needs an $4 billion more.

“The capital requirements we laid out for both FNM and FRE above would provide the GSEs with the capital base appropriate to protect against losses on the current credit book,” the brokerage said.

“However, for the GSEs to be a more active player in the secondary market, meaning a liquidity provider by buying assets to support pricing of these assets, we would argue the GSE would need an additional $8 billion to $10 billion in capital each.”

The brokerage also said that the markets were not expected to return to normal until sometime in late 2009 or early 2010. (Reporting by Tenzin Pema and Ramya Dilip in Bangalore; Editing by Amitha Rajan)

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