Fannie, Freddie shares dive on bailout fears : US Business

By Lynn Adler

NEW YORK (Reuters) - Investors dumped shares of Fannie Mae and Freddie Mac , driving them to their lowest levels in more than 18 years on mounting fears of a government bailout that would wipe out the stock value of the two U.S. housing finance giants.

Investors panicked that a bailout may be imminent after The Wall Street Journal reported that Freddie Mac executives would meet with Treasury officials on Wednesday, possibly to get clarity about how the government will support the company.

Anxiety about the companies has risen in recent days following a weekend report in Barron's newspaper that government officials may have no choice but to effectively nationalize Fannie and Freddie.

A Treasury spokeswoman, however, said that while the agency is in regular contact with the government-sponsored enterprises, it declined to confirm whether it was meeting with Freddie officials on Wednesday.

Freddie Mac's stock slumped nearly 30 percent to $2.95, the lowest since 1990, and Fannie Mae shares slid more than 33 percent to $4.00, the lowest since 1988.

"It's not just the housing picture that one has to fathom, but it's also public policy. What is the government going to do?" said Marshall Front, chairman of investment firm Front Barnett Associates in Chicago. "We continue to be concerned about what dilution would be required to stabilize Fannie and Freddie, and what that would leave over for existing shareholders."

Fears that the companies will need to be bailed out forced Freddie Mac to pay record-high yield premiums on a $3 billion debt sale on Tuesday.

However, the debt found favor for its perceived safety compared with Freddie Mac stock, and the yield gap over Treasuries was been sliced to about 0.98 percentage point from 1.13 points a day ago.

The turmoil spilled into the broader bond market, where U.S. Treasury bonds rallied on the prospect of government intervention. Stocks were slightly lower in choppy trade.

Freddie Mac representatives were not immediately available to comment on the reported Treasury meeting.

The Treasury was recently given new powers to backstop the mortgage finance companies by buying equity in them or providing loans.

"As you would expect, we have been in communication with the companies for months to receive updates and we have been communicating with their regulator and the Federal Reserve," Treasury spokeswoman Jennifer Zuccarelli said.

Earlier this year, Freddie Mac committed to raising $5.5 billion in fresh capital to bolster its balance sheet, but investors are unlikely to buy new shares if they fear a government rescue might wipe out their equity.

The two federally chartered companies own or guarantee almost half of all outstanding U.S. mortgages. The government is relying heavily on them to step up mortgage purchases to hold down home lending rates and help stabilize the worst U.S. housing market since the Great Depression.

Early on Wednesday, Fannie Mae sold $2 billion of bills at higher interest rates than it did for similar securities a week ago.

Fannie Mae Chief Executive Daniel Mudd, speaking Wednesday on National Public Radio, reiterated that the company has more capital than it has ever had and that it has not asked nor been offered help from the Treasury.

Closely watched hedge-fund manager Doug Kass, who has placed big bets that Fannie Mae shares will fall, said on Wednesday that the seriously depressed stock of the two companies will drop to zero, dismissing Mudd's comments about its capital adequacy.

"What Mudd didn't say is that the company is too leveraged to a depreciating asset -- housing -- and losses are off the charts and (there are) no signs of stability," Kass said in an interview.

Kass said he believes there will be "some de facto government rescue" of the companies, probably in the form of a series of extremely dilutive financings.

Foreign investment is being closely monitored, as ebbing demand means higher funding costs for Fannie and Freddie and thus rising home loan rates, analysts have said.

Overseas central banks dumped nearly $11 billion of agency-related securities during the past month.

Russia, for one, is not planning to rapidly raise or cut exposure to debt issued by Fannie Mae and Freddie Mac, Russia's deputy finance minister said on Wednesday.

(Additional reporting by David Lawder in Washington; Jonathan Stempel, Ellis Mnyandu and Jennifer Ablan in New York; Toni Vorobyova in Moscow; Editing by Tom Hals)

(c) Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.