Fannie and Freddie on Verge of Bailout

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Fannie Mae and Freddie Mac are on the verge of government intervention, reports the Financial Times. As credit worries continue to wreak havoc on the financial markets liquidity concerns at the two massive GSE’s sparked a stock sell-off that left both company’s stocks down nearly 25%.

Any government intervention or recapitalization would severely undercut the value of any current shareholder stock by diluting the living daylights out of it. Many had hoped that the mere notion of the US Treasury backstopping the GSEs would put an end to the market unrest. This drove Fannie and Freddie stock higher as investors gained confidence that the market would stabilize with the weight of a US government guarantee. Now that it looks exceptionally likely that it will actually happen investors are once again spooked.

From FT.com:

Fears about the financial system grew on Monday as money market liquidity tightened and sharp falls in the share prices of mortgage financiers Fannie Mae and Freddie Mac led the US stock market lower.

Fannie?s and Freddie?s shares lost 22 per cent and 25 per cent, respectively, after an article in Barron?s suggested that the US government was considering recapitalising the companies on terms that would all but wipe out existing shareholders.

The concerns about Fannie and Freddie also spread to their debt, which fell in price. This threatened to push interest rates on mortgages backed by the two firms higher and put further pressure on the battered housing market.

The price of insurance against default on Fannie and Freddie subordinated debt hit record levels in the credit default swaps market, according to data from Markit. Risk spreads on their senior debt ? which most analysts presume would be fully honoured by the government in any rescue ? widened to levels last seen in the immediate run-up to the Treasury?s July 13 rescue plan, Credit Suisse said.