Fannie, Freddie fall on bailout talk

Some fear investors would lose holdings

WASHINGTON - Shares of mortgage finance giants Fannie Mae and Freddie Mac tumbled yesterday amid renewed fears that shareholders will wind up with nothing if the government bails out the troubled companies.

The Treasury Department late last month gained 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, granted 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 again after a Barron's magazine article over the weekend, citing an anonymous Bush administration source, reported 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 but declined to comment further.

Lately, government officials' denials have not soothed investors. "Some of these things become self-fulfilling prophecies because market confidence is so fragile," said Karen Shaw Petrou, managing partner of the 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, government-sponsored companies that together hold or guarantee nearly half of all US 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, Va., company earlier this year promised to raise $5.5 billion to shore up its finances but has so far not done so. Its sinking share price makes doing so less attractive because the value of existing shareholders' stake would be diluted.