Fannie Mae and Freddie Mac Faltering
by Geoff Kelly - posted 3:59 pm, July 10, 2008
This sounds like bad news. From the New York Times:
Freddie Mac’s stock plunged more than 30 percent and Fannie Mae’s more than 20 percent in the first hour of trading. At 1 p.m., Freddie Mac was down 20 percent, to $8.26, and Fannie Mae was down 10 percent, to $13.71. It was the second straight day of declines for the companies.
Liquidity problems at the two firms, which operate under an implicit government guarantee, could cause catastrophic consequences for the American economy. Analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional stock, which would dilute their value for current shareholders.
In the last week alone, Freddie has lost 47 percent of its value, and Fannie is off 28 percent. Expectations of default at the companies has also risen; it costs three times as much today to guarantee a two-year Fannie bond as it did three years ago.
Speculation on the impact a crisis at Fannie Mae and Freddie Mac might have on the national economy has provoked quick reaction from government officials, especially Treasury Secretary Henry Paulson, who said to Congress, “In today’s world I don’t think it is helpful to discuss any financial institutions and whether they pose systemic risk.”