Fannie, Freddie fall on renewed bailout fears

updated 7:05 p.m. ET Aug. 18, 2008

WASHINGTON - Whether or not the government is actually on the verge of taking over mortgage finance companies Fannie Mae and Freddie Mac, investor fears that a bailout is imminent could turn such a worst-case scenario into reality.

Amid renewed concern that shareholders will wind up with nothing if the government intervenes to bail out the troubled companies, shares in the mortgage finance giants tumbled Monday to the lowest levels in nearly two decades.

Fannie Mae's stock slid more than 22 percent, or $1.76, to $6.15 on Monday, while shares of Freddie Mac fell 25 percent, or $1.46, to $4.39.

"Some of these things become self-fulfilling prophecies because market confidence is so fragile," said Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics in Washington.

However, a more likely scenario, analysts say, would stop short of nationalizing the two companies and would take the form of emergency loans to Fannie and Freddie from the Federal Reserve or Treasury Department.

The Treasury Department late last month gained the authority to boost Fannie and Freddie through an investment or a loan should the companies need their finances propped up due to soaring losses from bad mortgages.

The new government power, enacted by Congress after the companies shares plunged to levels not seen since the early 1990s, for several weeks quieted worries that the companies could collapse.

But investors were spooked once again, after a Barron's magazine article over the weekend, citing an anonymous Bush administration source, reported that the government is pressing the companies to raise more money to guard against losses but doesn't expect the companies to succeed.

The Barron's report said the government is likely to buy preferred stock in the companies, wiping out common shareholders.

Treasury Secretary Henry Paulson, who had spent the last week in Beijing attending the Olympics with his family, was back at work on Monday and aides said he was monitoring financial market developments as he always does.

Jennifer Zuccarelli, a Treasury spokeswoman, said the government has "no intention" of using its authority to invest in Fannie and Freddie and declined further comment.

Denials from government officials have not been soothing investors lately. "You don't pass that sort of legislation unless there's some sort of intent to use it," said Barry Ritholtz, chief executive of FusionIQ, an asset management and research firm in New York.

The housing slump and continuing distress in the mortgage markets have withered the profit margins of Fannie and Freddie, the government-sponsored companies that together hold or guarantee nearly half of all U.S. home mortgages.

In response to last month's steep slide in Fannie and Freddie's stock, the Securities and Exchange Commission banned some forms of trading that enable investors to bet that a stock's price will fall. That order, intended to prevent stock manipulation, expired early last week.

Freddie Mac, in particular, has investors and analysts fearful.

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