Why should I care about Fannie, Freddie?

That could turn out to be bad news for Fannie and Freddie's shareholders — who have already lost 80 percent of their investment as the mortgage giants' shares have dropped over the past year. If the companies issue more shares to the government it will dilute the holdings of existing shareholders, pushing down the price further.

If you don't hold Fannie or Freddie shares, you may wonder why that matters to you. The answer is that a large chunk of Freddie and Fannie stock is held by the nation's banks, which are already suffering from the rise in bad loans and the credit crunch. The last thing they need right now is to lose more money on their Freddie and Fannie shares.

Whatever the outcome, the longer it takes to come up with a solution, the bigger the problem will get. It's pretty clear that the government can't let these two companies run out of cash: A default on their obligations would touch off another earthquake in an already fragile financial system. Over time, Freddie and Fannie may become much smaller players in the mortgage market — there are plenty of other lenders and sources of capital out there.

But lenders and investors are so spooked these days by the continued losses from commercial and investment banks — and the ongoing slide in house prices — that they're reluctant to get into the mortgage market just yet.

So until home prices bottom out, and banks and investment firms stop reporting big losses every three months, Fannie and Freddie are pretty much the lenders of last resort to provide the money needed to keep the mortgage market funded.

Are mutual fund holders safe if the investment banks that run the funds go under?
— Bill, Atlanta, Ga.

Generally, yes — the odds of losing money this way are pretty remote.

A mutual fund is more than just a pooled account holding a portfolio of stocks or bonds. Each fund is set up as an investment company, governed by rules and regulations enacted to protect mutual fund investors. While the assets are managed by an investment adviser — who may be hired by an investment bank — the holdings are kept in a separate trust or corporation at a custodial bank. So they're not part of the investment bank's assets: If the bank runs into trouble, it can't use the mutual fund holdings to offset losses from other businesses.

But keep in mind that the investment bank selling mutual funds makes its money charging management fees. With profits squeezed, it may look for ways of increasing those fees. It's always a good idea to keep a close watch on what you're being charged. One or two percent may not seem like much, but over the life of your investment it makes a big difference.

The other way you may be covered is through the Securities Investor Protection Corp. or SIPC. This federal agency protects assets held by member brokerage companies — much like the FDIC insures deposits in savings banks.

If the brokerage or investment bank holding your stocks or mutual fund shares goes bust, the SIPC steps in and makes sure you get back your investments. The SIPC does not protect against financial fraud, however.

Of course, there are no protections for investors who lose money because the fund manager made bad investment decisions. Of all the risks involved in mutual fund investing, "management risk" is probably the hardest to protect against.

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