PANIC: Fed Mulls Takeover To Avoid Meltdown

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NEW YORK TIMES: Shares of Fannie Mae and Freddie Mac, the beleaguered mortgage finance companies, plummeted again on Friday as the Bush administration sought to allay market fears. Following a report that the administration was considering a plan to take over one or both of the companies and place them in a conservatorship if their problems grow, Fannie Mae stock was down 25 percent in midday trading compared with Thursday’s closing price; Freddie Mac stock was down 21 percent.

Fannie Mae and Freddie Mac have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt. Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.fanniemae.jpg

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt. A conservatorship or other rescue operation would be the second time in four months that the Bush administration has stepped in to engineer a rescue to prevent the financial system from collapsing. Last March, it forced the sale of Bear Stearns to JPMorgan Chase to avert a bankruptcy of that venerable investment house. Officials have also been concerned that the difficulties of the two companies, if not fixed, could damage economies worldwide. The securities of Fannie and Freddie are held by numerous overseas financial institutions, central banks and investors. MORE

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