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Investor Jitters Deflate Fannie, Freddie Shares

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Thursday, August 21, 2008

Shares of Fannie Mae and Freddie Mac tumbled more than 20 percent yesterday, hitting their lowest levels in nearly two decades, as investors fled out of fear that a government initiative to save the ailing mortgage giants could render their stock worthless.

The stock sell-off came a day after Freddie Mac was forced to pay an unusually high interest rate on five-year notes to entice investors to purchase its debt.

While the companies continue to insist that their fundamental finances are sound, investor confidence in Fannie Mae and Freddie Mac has taken a pounding this week as speculation about a federal government bailout has gained pace in the news media and among market analysts.

"Perception creates its own reality," said Howard Shapiro, an industry analyst for Fox-Pitt Kelton Cochran Caronia Waller. "I don't think we can rule out a government intervention. Fannie and Freddie are crucial to stabilizing the housing market, and the housing market is crucial to stabilizing the banks and the financial services industry."

Concerns about the financial condition of the mortgage lending giants prompted lawmakers last month to grant the Treasury Department emergency authority to prop the companies up with a cash infusion, either through loans or by buying stock. Treasury Secretary Henry M. Paulson Jr. has said he does not plan to use the power.

But if he does, Treasury officials have stressed they would seek to protect taxpayer money even if that means existing shareholders are forced to take a loss.

Shares of District-based Fannie Mae fell 27 percent, to $4.40, yesterday, and those of McLean-based Freddie Mac declined 22 percent, to $3.25. This week alone, both companies' shares dropped 44 percent in very heavy trading.

A year ago, Fannie Mae shares were selling in the $70-a-share range. Freddie Mac was trading in the $65-a-share range. Fannie Mae's market value, based on its stock price, has plummeted 88 percent, or $34 billion, this year to $4.73 billion. Freddie Mac's value has dropped by $20 billion, or 90 percent, to $2.1 billion.

The companies have reported a combined $14.9 billion of net losses over the past year.

A growing chorus of industry analysts are predicting that the government will have to intervene to prevent further deterioration of the firms, which own or guarantee half of the nation's mortgage debt.

"Given where the prices are trading at, I don't see anything but a government bailout at this point," Paul Miller of Friedman, Billings, Ramsey Group said in an interview. "The market is telling you that the government is going to step in. It's almost a self-fulfilling prophesy."

Miller, a prominent analyst who follows the companies, had previously said he doubted that the government would have to step in.

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