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Fannie, Freddie Shares Plummet Despite Reassurances

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The Associated Press

Published: August 21, 2008

WASHINGTON - Shares of mortgage finance companies Fannie Mae and Freddie Mac continued their plunge Wednesday as investors became increasingly convinced that the stocks will drop to zero if the government bails out the troubled companies.

Fannie Mae's chief executive officer sought to reassure investors that no bailout is imminent.

"They haven't offered anything, and we haven't asked for anything," Fannie Mae CEO Daniel Mudd said in a public radio interview Wednesday morning. "I don't anticipate that they will do that."

Mudd said the company's financial position "remains very strong" and that he intends to remain CEO.

Executives with McLean, Va.-based Freddie Mac met with Treasury Department officials Wednesday morning, according to two sources familiar with the meeting who were not authorized to discuss its contents publicly. They described it as part of a regular series of meetings that have been occurring since last month when the Bush administration announced a plan to aid the two companies.

The two government-sponsored companies, the largest source of funding for home mortgages in the United States, have struggled with soaring losses from mortgage defaults. Washington-based Fannie Mae and Freddie Mac have lost a combined $3.1 billion from April to June, and investors fear the losses will continue to grow.
Fannie Mae shares closed at $4.40 on Wednesday, down $1.61, or 27 percent. Freddie Mac shares slid 92 cents to close at $3.25, down 22 percent.

Both companies' stocks are down about 90 percent so far this year.

"They don't have insight on how bad losses are going to get," Friedman, Billings, Ramsey & Co. analyst Paul Miller said Tuesday.

The Bush administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and to purchase stock in the two companies if needed for a period covering the next 18 months. Congress ultimately adopted those proposals as part of a broader bill that also seeks to help keep 400,000 households from losing their homes to foreclosure.

Critics charged that the open-ended nature of the support would expose taxpayers to billions of dollars of potential losses.

Treasury Secretary Henry Paulson has insisted that the package needed to be structured in this way to boost financial markets' confidence as the companies deal with mounting losses from mortgages that have gone bad.

But investors have grown worried in recent days, after a Barron's magazine article 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 them to succeed.

The Barron's report said the government is likely to buy preferred stock in the companies, wiping out common shareholders. Paulson has declined to comment on whether a rescue is imminent.

Freddie Mac, in particular, has investors and analysts fearful. The company this year promised to raise $5.5 billion - more than double the company's $2.3 billion in market value around noon Wednesday - to shore up its finances.

Freddie has yet to do so, and its sinking stock price makes selling shares ever more difficult. Plus, the value of existing shareholders' stake would be vastly diluted.

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