Guardian UK: US economic crisis: Freddie and Fannie shares fall further on bailout fears

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US economic crisis: Freddie and Fannie shares fall further on bailout fears

David Teather
guardian.co.uk, Tuesday August 19 2008 17:45 BST



Shares in Freddie Mac and Fannie Mae, the firms that finance more than half the mortgages in the United States, remained under pressure today amid renewed fears that Washington could be preparing an emergency bailout.

Both firms suffered sharp declines on Monday following publication of a report that suggested the US government is pessimistic about Fannie and Freddie's ability to raise further finance on the markets and is preparing to mount a rescue using taxpayers money. According to the report in the US financial weekly Barron's, the injection of capital would be tantamount to a "quasi-nationalisation".

Shares in both companies fell to their lowest in two decades on Monday, Freddie dropping 25% and Fannie 22%. By midday on Wall Street today, Freddie shares had fallen a further 6% to $4.14 and Fannie was off 4% at $5.90.

According to Barron's the Treasury is preparing a plan to buy preference shares in the companies that would command such seniority that they would effectively wipe out the value of existing ordinary shares. There would be other conditions tied to the injection of capital. The government would install new management and directors and also curb some of the companies' activities.

Freddie and Fannie occupy a pivotal role in the American financial system. They operate a secondary mortgage market, designed to increase the supply of money available for banks to lend to homeowners, and the collapse of either could provoke systemic failure in the financial markets. The government-sponsored companies buy mortgages from lenders and then package them up and sell them on to financial institutions around the world.

In a test of investor confidence, Freddie was today placing $3bn (£1.6bn) of five-year debt and was forced to offer a yield of 4.16%, one of the highest premiums the market has seen for that type of bonds.

Freddie and Fannie have racked up combined losses of more than $14bn over the past year as increasing numbers of homeowners have defaulted on their mortgages. ......(more)

The complete piece is at: http://www.guardian.co.uk/business/2008/aug/19/subprimecrisis.useconomy