Shares of Fannie Mae, Freddie Mac Plummet

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By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, July 8, 2008

Investors dumped shares of Fannie Mae and Freddie Mac yesterday based on worries that the two pillars of the housing market could be forced to raise $75 billion of capital, potentially confronting them with an overwhelming burden and crippling already struggling financial markets.

Fannie Mae's stock price plunged 16.2 percent, to $15.74, and Freddie Mac's fell 17.9 percent, to $11.91 -- their lowest since 1995.

The sell-off came after a report warning that a proposed change in accounting rules could weaken Fannie Mae and Freddie Mac so severely that it "could possibly topple the already fragile capital markets."

Though it raised the specter of a calamity, the report by Lehman Brothers analyst Bruce W. Harting predicted that accounting rulemakers would make an exception sparing Fannie Mae and Freddie Mac.

"[W]e believe calmer heads will ultimately prevail," Harting wrote.

But an official at the Financial Accounting Standards Board, which sets accounting rules, said a first draft of the board's proposed change would apply to the two companies. The draft underscores that point by including an example that covers their business operations, the official said. The official spoke on condition of anonymity because the document is preliminary and has not yet been released for public comment.

A spokesman for FASB said the proposed change had a long way to go before adoption.

"All of what you're seeing out there right now is extremely speculative," FASB spokesman Neal McGarity said.

At issue are trillions of dollars in mortgage guarantees that Fannie Mae and Freddie Mac made but are not included on their balance sheets as assets or liabilities. FASB's proposed rule would require the companies to move the guarantees to the balance sheets, forcing them to hold additional capital to cover those obligations.

FASB is considering changing the accounting rules in ways that could make it harder for a wide array of companies to keep assets and liabilities off their balance sheets. The rulemaking body wants to make such obligations more visible to investors, the FASB official said.

The general concern over hidden liabilities was brought to the fore earlier this decade by the scandal at Enron. Unlike Enron's extensive liabilities, Fannie Mae and Freddie Mac's mortgage guarantees are detailed in public reports.

Freddie Mac spokeswoman Sharon McHale said the proposed change "could have an effect on our ability to serve the housing market, and we hope that FASB would take into account our mission and our business model in any final decision." Freddie Mac has been discussing the matter with FASB, McHale said.


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