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Fannie, Freddie Shares Plunge as Unease Rises
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With the housing market in continued decline, many investors think Fannie Mae and Freddie Mac will need to raise fresh capital. That expectation has put downward pressure on their stock prices because selling more shares to raise money dilutes the value of current shares.
Peter Schiff, president of Euro Pacific Capital, predicted that the companies would have a hard time raising capital from private sources. "That's like selling tickets for the Titanic after it's already hit the iceberg," he said.
Government leaders, including those at the Federal Reserve, take some solace in the large holdings of mortgage assets that the two firms have on their books. But selling those assets -- home loans and mortgage-backed securities -- could drive up mortgage rates, former Treasury official Peter Wallison said.
Short of lending them money or taking them over, one way the government could shore up faith in the companies would be to state explicitly that it stands behind them. However, that would run counter to the administration's long-standing position that companies must be held accountable to the market's checks and balances. Treasury Secretary Henry M. Paulson Jr. reiterated that philosophy in prepared testimony yesterday, saying: "For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily available."
Sen. John McCain, the presumptive Republican nominee for president, sent a different message. Fannie Mae and Freddie Mac "must not fail," he said, adding, "I will be looking at all the options that are, will be necessary" to keep them viable.
McCain said he didn't think a bailout was required, and Paulson noted that the companies' regulator "has made clear that they are adequately capitalized."
Fannie Mae and Freddie Mac tried to turn investors' anxiety to their political advantage, lobbying to make the housing relief bill that is moving through Congress more favorable to their interests.
Staff reporters Michael Fletcher, Neil Irwin, Michael Shear and Mike Shepard contributed.
