Treasury's Vigil On Fannie, Freddie

Other analysts who closely follow the Treasury said that no action appears imminent this weekend. Paulson has repeatedly said he has no plans to use the new authority that Congress granted him July 30 to lend or invest in the two companies.

Treasury has said very little in recent days, in an effort to contain market alarm over the two companies, analysts said.

"We continue to communicate with the companies and their regulators and are staying on top of the situation," said Treasury spokeswoman Michele Davis, declining to elaborate.

The powers granted to Paulson were broad enough to give him several options. He could buy bonds from the firms, essentially giving them a loan, or create a special class of preferred shares that would require the firms to refund the government's money before that of other shareholders in the case of a bankruptcy, analysts said.

Some of the banks with the biggest exposure include Regions Financial, which has an estimated $200 million, M&T Bank with $161 million, and Astoria Financial Corp. with $83 million, according to Fox-Pitt Kelton, an investment bank.

"If the preferred is wiped out, that hurts the entire banking system," said Howard Shapiro, an industry analyst for Fox-Pitt. "There are numerous banks that have a fair amount of exposure. This is just another difficulty that the banks, who are short of capital, will have to overcome."

But Len Blum, managing director at Westwood Capital, said that may be unavoidable.

"It's absolutely ridiculous that Fannie and Freddie are still paying out dividends," he said. "And it's ridiculous that you would have a company where shareholders make all kinds of money when the housing market is good and taxpayers have to shoulder all the costs when the housing market is bad. How is that good for the nation? I think it's only fair to taxpayers that the preferred shareholders get wiped out."

Instead of trying to prop up the value of preferred shares, regulators should be encouraging community and regional banks to raise capital to replace those investments, he added. "We have to be realistic about what things are worth," Blum said.

The yield, or return on preferred stock dividends, yesterday reached 19.1 percent for shareholders in Fannie and 20.2 percent for those invested in Freddie.

Any cut to those payouts would make it more difficult for the mortgage firms to raise money through the issuance of preferred shares as investors will be less willing to buy diluted stock that pay low dividends.

Common shares, which have also been falling precipitously in recent weeks, are not nearly as important to Treasury officials, though their low levels are an indication of a lack of confidence in the companies by debt holders, an official with one of those companies said, speaking on condition of anonymity because he was not authorized to talk about the firms.

Shares in District-based Fannie rose 15 cents, or 3.1 percent, but have lost more than 90 percent of their value over the past year, while those of McLean-based Freddie dropped 35 cents, or 11 percent, and are down nearly 96 percent over the past year.