The ramifications of these two mortgage giants going under is not pretty...big bailout on the way funded by you, joe taxpayer.

Fannie and Freddie on the brink
Continued sharp slide in shares of mortgage finance firms raises new concerns about need for new capital, threat of government takeover.

Last Updated: July 11, 2008: 10:59 AM EDT


Financial stocks get slammed
Read Treasury Secretary Paulson's statement
Paulson: Focused on Freddie, Fannie
The $5 trillion mess


NEW YORK (CNNMoney.com) -- The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached fever pitch on Friday as shares plunged on speculation of a looming bailout.

Immediately after the markets opened, shares of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) fell more than 47% from their already battered closing price the day before. They soon rebounded slightly but Fannie shares were down 43% and Freddie shares were off 45% about an hour after opening.

The two firms hold or back $5 trillion between them, or about half the mortgage debt in the country.

They play a central role in the U.S. housing market, providing a crucial source of funding for banks and other home lenders, especially since a credit market crisis last summer left them the only major players in packaging pools of mortgage loans into securities for sale to investors.

If they were unable to do so, it would significantly raise the cost and restrict the availability of mortgage loans, causing significantly more problems for already battered housing prices and sales. That in turn would be another significant problem for the overall U.S. economy, as well as global credit markets.

The New York Times reported Friday that senior Bush administration officials are considering a plan to have the government take over one or both of the companies if their problems worsen.

The shares started to erase early losses when word came that Treasury Secretary Henry Paulson was set to speak. He said that the government's primary focus is making sure that mortgage giants Fannie Mae and Freddie Mac remain as presently constituted to carry out their mission.

Even before the latest report on a possible rescue plan, speculation about the future of the firms this week sparked a run by investors away from their shares. That in turn raised questions about how difficult and expensive it will be for them to raise needed capital in the future, which fed into the stock plunge in a vicious cycle.

In the first four trading days of the week, the shares of Fannie have lost 30% of their value, while Freddie shares have tumbled 45%. For the year, Fannie is down 67% and Freddie 77%.

"Fannie Mae and Freddie Mac have lost investor confidence evidenced by the rapid brutal sell-off in their stocks, which could dramatically hinder their ability to raise any additional capital going forward," wrote Richard Hofmann of research firm CreditSights in a note Friday. He added that the firms' ability to function normally "remain at the core of government efforts to stabilize the mortgage markets."

A number of scenarios were being discussed by bankers and analysts about what the government may do to deal with investors' current crisis of confidence in the firms.

Jaret Seiberg, a financial services analyst for the Stanford Group, a Washington research firm, said Thursday options that among the options are: The Federal Reserve could purchase some of the Freddie and Fannie debt or mortgage-backed securities; the Treasury Department could make billions of dollars in loans to the companies or even buy stock in the companies.

"Government officials are always planning for worst-case scenarios and our note is intended to highlight some options that may be available to policymakers," he wrote. "We suspect hybrid versions of these plans also are possible."

Under current law, the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie and Freddie, could take control of the firms if their capital falls too far below required levels. It is unclear how the firms would operate in that situation, known as a conservatorship.

OFHEO Director James Lockhart issued a statement late Thursday saying that his agency was closely monitoring the firms' credit and capital positions. But he pointed out that they had already raised $20 billion in capital and that they adequately capitalized, holding funds well in excess of his agency's requirements.

Still investors were worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.

It is also unclear if current shareholders would see their holdings wiped out under some of these government rescue options - leading to the pre-market sell-off.

A Fannie spokesman said Friday morning that the company had no comment, while a spokeswoman for Freddie was not available for immediate comment. Both firms issued statements on Thursday saying they had the necessary capital to continue operating, adding they would not comment on the decline in their stock value.

First Published: July 11, 2008: 8:35 AM EDT

I just asked BlueJay on another thread how he felt about Phil Gramm being John McCain's financial adviser. Gramm pretty much defeated the most important lending and banking regulations put in place during the great depression. So, now, you have articles like the one above.

Even if you love McCain, you better pray Gramm doesn't come along with the package for president.

"You've heard of mental depression; this is a mental recession," and "We have sort of become a nation of whiners, you just hear this constant whining, complaining about a loss of competitiveness, America in decline." - Phil Gramm - July, 2008.

FACT: Mortgage crisis brought on by people whom signed on the bottom line all by themselves. YUP that's right, no help! Imagine responsible adulthood. Even after they were explained to what could happen and the risk involved if their rate went up.

FACT: Oil prices controlled by supply/demand and market speculation. Speculation from Iran threatening to destroy the middle east.

FACT: The above are the TWO biggest factors in our economy.

*subnote - Although any racist comments on behalf of Trinnity united church of Christ are dismissed by Obama (member therein). No problems there...What meh worry!

FACT: YOU ARE COMPLETELY WRONG. Those people that are losing their houses were only allowed consideration for a loan because of the deregulation of the banking/securities industry, spearheaded by your buddy Phil Gramm. We won't even get into fraud and predatory loans from those same institutions .

The oil industry is all smoke and mirrors - they can charge whatever they want, what are we gonna do about it.

So laughing, next......

If I recall,the bill to deregulate banking was signed into law by none other than Bill Clinton. Shouldn't he share some of the burden here as well? Not to mention all of the other Congressmen and Senators that voted in favor in order to get it onto the desk of the Prez.

Why should poor Phil get all of the blame?

So when you signed (if you have a home), it was Gramm's responsibility?!? LOL. j/k =P

Ya gotta look at the glass half full. I know it's hard to do sometimes when the mentality of your side if anything remotely Republican is corrupt, wrong, evil or bad. I know, I know...People like childish Keith Olberman give you guys a bad partisan rap, but you've just got to look beyond the fences.

Mortgages were changed to give oppurtunity to people whom otherwise wouldn't have a home. What they do with that oppurtunity is their choice and their responsibility. It's like somebody handing you a second chance for the American dream of owning a house. Now I do give you the token misleading broker signing people up on rip-off loans, but every economy in the world has scammers. IF a bank or broker intentionally signed someone up for a loan knowing their client couldn't make the payments that would be one thing. But knowing it's not in their interest to own empty homes, it's highly unlikey. 99+% of American homes are NOT in foreclosure and make their payments.

Be wise, weary and do your research. It's not the sort of corruption like a Country Wide scandal where they gave out low interest rate sweetheart loans using your above mentioned spearheaded tactics to democrats like Obama and all his neighbors around him.

Because Phil is a jaca##, that's why..........................

I see goot_gay is back after his stint as a male prostitute...................at least he had a job.

The US economy is in for some very serious problems. I figured about 8 months ago the Dow would see 11 k before 14, and today I saw I was correct.

I now figure it will see 9 k before 12 k, and can't see any reason to think otherwise.

De regulation is a wingnut mantra, and so I wouldn't expect anything else from boot_gay, even though anyone with half a brain would know what happens with unregulated markets, especially those having anything to do with banks, or insurance companies.

Prepare to bail these guys out, and just like the other bailouts , it'll be done on borrowed money.

Save America, hang a Republican from your nearest lampost, and beat them with your shoe.

Obama got his rate because he was
!. not in debt, 0 credit card balances (As opposed to McCaint's, who carry about 500k)
2. Excellent credit, with a bunch of money in savings
3. Large down after he got paid for his book.

Anyone else who had that sort of record would have also got 50 basis points less.

boot_gay, you're still lousy at this, don't you have a street corner to stand on , or an airport restroom stall you have to 'visit'.

You know it's funny to listen to people talk about market deregulation like they actually know the regulations which you know damned well they don't LOL.

Male prostitutes make more money then female.

Obama got his loan from his neighbor. Google it.

All of the states have been trying deregulation since the '70s. WA did it in '85. Deregulation doesn't hurt businesses that make wise decisions with their money.

Stay tuned for bailouts of major U.S. businesses to come. I think G.M. will be up for some of that action in the not too distant future as well. They are now giving 7 year 0 interest loans to anyone that will take a Hummer or other gas guzzler off their hands.

Yeah I figure 5 or so large banks and corps will be lining up for 'help'. so they can 'keep jobs in America'.

This , of course will be the same group of banks and corps that lobbied hard for de regulation, and wanted the 'government off their back' so they could 'compete' in the 'global economy'.

They should simply be allowed to fail, and the government should stay out of it, same goes for Bear Stearns, never should have been allowed to happen.

The US economy is on much shakier ground than the average American has even a clue about.

Gald to hear you were making a living as a gay hooker bootster...............don't forget to declare those 'tips' from your Republican male clients as income, you know they'll report the tips as 'expenses'...........

[quote=blue_jay]"FACT: Oil prices controlled by supply/demand and market speculation. Speculation from Iran threatening to destroy the middle east.



Not totally correct. The fact is oil is priced in U.S. dollars. Our dollar is in the toilet, hence the cost of oil goes up. Yeah, worldwide demand is growing but a crappy U.S. fiscal policy is also a major factor.

Did you know that 70% of U.S. Treasury Bonds are bought by foreign investors? If the dollar wasn't in such poor shape I would think some of those people would try to dump those bonds. We would be in some very serious trouble if that were to happen. Not that we aren't on the verge of that now.

I read last week about how some major EU banks and investors were pulling large amounts of cash and investments in the US. They would like to be 'out' by the Fall. I think it was in the IHT.

BTW, anyone out there still buying the 'Inflation is at 4%' line around here ?

:roll:

CNN.com...front page. 2nd biggest bank failure in US history just happened today at 3pm. Get ready for more ie WAMU and Wachovia are the two biggest being mentioned right now...

I see a serious recession lasting for years. There is simply no way our economy can absorb $4.00 gas without huge disruptions. Everything from RV sales, to cars, trucks, campgrounds, gas stations etc. etc. will be negatively effected. Add the mortgage mess to the mix and we are in for a loooong tough time.

I do not blame Bush for this but certainly can't credit his team with doing much to help either.

I doubt either candidate can do much about it, but the loser will undoubtedly blame the winner for not fixing everything in a flash.

We will never again see cheap oil and that will significantly affect almost every aspect of our lives.

I agree DV, we are in a recession and its going to be a long one. Ya KK, 4% inflation my ass...try 14%+ in reality. IF Fannie and or Freddie bite it and their 5 TRILLION in mortgages along with it we are hearing the word DEPRESSION being mentioned seriously for the first time in 75 years from respected voices in the financial world.

Hope the doomsdayers are wrong but if those two go down it will make these bank failures pale in comparison. One lesson to be learned from IMB implosion today is if you are fortunate enough to have 100k+ liquid make sure it is in various locales and not locked up in any one bank as if what happened today happens to WAMU or Wachovia or whoever next week or month anything over that 100k could easily just disappear...ah screw this im gonna go have a beer...cheers

Keep smilin boys--we still live in America!

thats true, we coulda been born in somalia

If the price of fuel stays the same or goes higher, DV is right. Our oil based economy will crash like a house of cards. In our area, Boeing being a big employer will get hit hard. Price of fuel goes up, airlines cut back on flights, raise prices, buy less parts, cancel orders. Can you imagine a large chunk of those folks losing their jobs and not being able to pay for those houses? Ouch!

Drill now!