Fannie and Freddie sink on federal-rescue fears

WASHINGTON — Fears that the government will be forced to rescue Fannie Mae and Freddie Mac could well become a self-fulfilling prophecy.

Shares of the government-chartered mortgage finance giants plummeted Thursday and are trading at levels last seen in the early 1990s. If the prices don't recover, it will be harder for the two companies to raise more money through stock sales to compensate for losses from the housing bust. Investors are afraid their stakes will vanish if the government is forced to rescue the companies.

"The government has to step in and do something," said Friedman, Billings, Ramsey & Co. analyst Paul Miller.

Freddie Mac shares fell $2.26 or 22 percent, to $8, after sinking as low as $6.75 earlier in the day. Shares of Fannie Mae fell $2.11, or 13.8 percent, to $13.20, after earlier falling to $11.70.

Testifying on Capitol Hill, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke sought to calm investor jitters about the financial health of Fannie and Freddie, while urging Congress to give them new regulatory tools to better protect the country from economic and financial havoc if a major Wall Street firm were to fail.

Both regulators endorsed creating new procedures for the government to guide an orderly liquidation of a failing investment bank to minimize any fallout inflicted on the overall economy. Such procedures, already in place for commercial banks, might have made for a more orderly dissolution of investment firm Bear Stearns.

Bernanke defended the Fed's decision to provide about $29 billion in loan assistance in JPMorgan Chase & Co.'s takeover of Bear Stearns earlier this year, but he said it "is not something I want to do again."

Despite Wall Street's questions about Fannie and Freddie, and concerns about other investment banks faltering, Congress has a full plate and is unlikely to give financial regulators new powers before the next administration takes over.

Paulson told lawmakers that Fannie and Freddie are "working through this challenging period," but he would not say if they pose a risk to the U.S. financial system. "In today's world, it is not helpful to speculate about any financial institution and systemic risk."

James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said the companies' capital levels are "well in excess" of government requirements.

Meanwhile, politicians vowed to intervene if necessary. "They cannot and will not fail," presumptive Republican presidential nominee Sen. John McCain told reporters.