Stocks Slump In Light Trading

Market Wary of Fannie, Freddie

NEW YORK, Aug. 18 -- Concern that Fannie Mae and Freddie Mac will need a government bailout pummeled the shares of the two mortgage-finance companies and dragged U.S. stocks lower Monday.

The Dow Jones industrial average and the Standard & Poor's 500-stock index each dropped more than 1.5 percent. But trading was unusually light, suggesting to some traders that the decline was more of a pause than an inflection point for a market that has rallied in fits and starts over the past six weeks.

"There isn't a lot of volume, so though we're down a lot, I don't think it necessarily signifies a change in sentiment," said Neil Massa, an equity trader with MFC Global Investment Management in Boston. "It's healthy in these kinds of markets for people to have time to breathe or take time to consolidate before you continue the uptrend."

Only 986 million shares switched hands on the New York Stock Exchange, making Monday's session the most thinly traded of the year.

The Dow fell 180.51, to 11,479.39. All 30 members of the blue-chip average lost ground, with banks and financial stocks accounting for five of the six biggest decliners.

Fannie Mae and Freddie Mac posted the biggest drops among stocks in the S&P 500, which fell 19.60, to 1278.60.

Fannie Mae shares plunged 22 percent, or $1.76, to $6.15, and Freddie Mac shares tumbled 25 percent, or $1.46, to $4.39, after Barron's reported that the federal government may soon step in to help the troubled mortgage companies with a capital infusion that could wipe out common stockholders.

"We're not going to comment on speculation," said a spokeswoman for the Treasury Department, which recently won congressional approval to shore up the companies, either through loans or stock purchases, in case of an emergency.

"Regarding the Treasury's new authorities, the secretary has said many times he has no intentions of using it," the spokeswoman said.

Sharon McHale, a spokeswoman for Freddie Mac, said that the Barron's article "significantly overstates Freddie Mac's financial situation" and that the company "continues to be adequately capitalized." Freddie Mac raised $6 billion of capital last year and could still tap the debt markets "at attractive spreads," or interest rates, she said.

A Fannie Mae spokesman, Brian Faith, said the company "continues to exceed" capital requirements stipulated by regulators and would "continue to provide stability and liquidity to the housing market."

Fannie Mae raised $7 billion of capital in the second quarter to give it flexibility to weather the housing market decline and the resulting credit crunch, he said.

But Monday's reaction by shareholders in Fannie Mae and Freddie Mac indicates that investors expect the companies to have a tough time raising additional money on their own, said Richard Cripps, chief investment officer at brokerage firm Stifel Nicolaus in Baltimore.

A cash shortfall for either company could prompt Treasury Department officials to use their newly granted authority to bail out the companies.

"I don't think they want to use it or intend to use it . . . but the market is basically providing its own view that in the end, [the Treasury Department] will have to be the source of that capital," Cripps said.

Movers

UnionBanCal rose $7.69, to $73.18, one of the exceptions in the financial sector. Japanese bank Mitsubishi UFJ Financial Group raised its bid to buy the rest of UnionBanCal it doesn't already own.

Lowe's rose 4 cents, to $24.54, after its forecast came in below analysts' expectations.

Staff writer Jeffrey H. Birnbaum contributed to this report.