The Fannie and Freddie doomsday scenario
It's time to wonder what would happen if Fannie Mae and Freddie Mac failed.By Katie Benner, writer-reporter
Last Updated: July 10, 2008: 1:34 PM EDT
NEW YORK (Fortune) -- Here's a scary, and relevant, question to ponder as the housing market continues to slide: What would it take for the government to step in and help Fannie Mae and Freddie Mac, and how would a rescue affect you, the taxpayer?
It's been a brutal week for Freddie (FRE, Fortune 500) and Fannie (FNM, Fortune 500). A Lehman analyst report Monday kicked off a stock rout that had shares in both mortgage lenders hitting fresh multi-year lows Thursday. Freddie was down 19% in afternoon trading; Fannie was down more than 10%.
The stock plunge, together with Fed Chairman Ben Bernanke's downbeat housing outlook on Tuesday, is forcing investors to consider what would happen if a bailout is needed - a prospect raised Thursday when William Poole, the former president of the St. Louis Federal Reserve, told Bloomberg the companies are already "insolvent."
Also on Thursday, The Wall Street Journal reported that officials at the U.S. Treasury Department have been monitoring the companies for months as part of its normal contingency planning, but that discussions about what to do should they collapse have picked up in recent weeks.
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