Mortgage giants decline over renewed bailout fears

By Alan Zibel ASSOCIATED PRESS | Tuesday, August 19, 2008

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Shares of mortgage finance giants Fannie Mae and Freddie Mac tumbled Monday amid renewed fears that shareholders will wind up with nothing if the government intervenes to bail out the troubled companies.

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.

Shares of Fannie Mae fell more than 22 percent, or $1.76, to close at $6.15. Shares of Freddie Mac fell almost 25 percent, or $1.46 to $4.39.

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

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

But denials from government officials have not been soothing investors lately. "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.

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 short sellers 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.

The McLean-based company earlier this year promised to raise $5.5 billion to shore up its finances but has so far not done so. The company's sinking share price makes doing so less attractive because the value of existing shareholders' stake would be diluted.

Washington-based Fannie Mae and Freddie Mac are the nation's largest buyers and backers of mortgages. But they lost a combined $3.1 billion between April and June. Half of their credit losses came from so-called Alt-A loans, which were made to borrowers with solid credit but little proof of their incomes, or small or no down payments.

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