Freddie turmoil

Shares in Freddie Mac and Fannie Mae plummeted further in early trading on Friday amid speculation that a bailout of the government-sponsored mortgage financiers was imminent, and that such a bail-out would leave little if any value for current shareholders.

Fannie was down 44.7 per cent early on Friday morning, while Freddie’s shares fell 44.5 per cent. That came after frantic trading on Thursday in New York had already dragged both mortgage giants’ shares down to their lowest levels since 1991.

The US Treasury and Bush administration have discussed “contingency plans” that would co-ordinate a rescue of the two government-sponsored enterprises, but no such rescue would be undertaken unless and until the agencies are deemed undercapitalised, according to people involved in the talks.

In response to the reports of contingency plans for a rescue, Hank Paulson, Treasury secretary, said in a short statement that he was committed to supporting the two mortgage finance companies in “their current form” and gave no hint that the government was about to bail them out.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Mr Paulson said. “We are maintaining a dialogue with regulators and with the companies.’”

Mr Paulson, together with the companies’ regulator and Federal Reserve chairman Ben Bernanke, has given repeated assurances in recent days that Fannie and Freddie remain ”adequately capitalised” under current regulatory standards.

Other participants in the mortgage market, including Lehman Brothers, also suffered steep falls on Thursday, although the overall stock market climbed higher. Lehman fell a further 14 per cent on Friday morning.

Investors were unnerved on Thursday by a warning from Bill Poole, former president of the Federal Reserve Bank of St Louis, that the chances that a bail-out of Fannie and Freddie might be needed were increasing.

Mr Poole said Freddie Mac owed $5.2bn (£2.6bn) more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules.

Freddie Mac argues that such a measure does not reflect the economics of the company, which holds mortgages to maturity but has to account for them at today’s market prices.

Fannie and Freddie account for nearly three-quarters of new US mortgages, and their difficulties add to worries about the US economy. Many investors assume that the US government would have to take action to prevent a collapse of Fannie and Freddie, potentially at a big cost to taxpayers.

Speaking before the House financial services committee on Thursday, Mr Paulson and Mr Bernanke sought to calm the markets.

“Fannie Mae and Freddie Mac are...  working through this challenging period,” Mr Paulson said. “They play an important role in our housing markets today and need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalised.”

Mr Bernanke added: “I believe they are well capitalised in a regulatory sense.” However, he added that, like other financial institutions, Fannie Mae and Freddie Mac should also try to raise more capital.

Mr Bernanke and Mr Paulson were testifying at the first congressional hearing called to examine changes to the US financial regulatory system in the wake of the credit crisis.

The future of Fannie and Freddie was also discussed on the presidential election campaign trail, where John McCain, the Republican candidate, said the two companies “are vital to Americans’ ability to own their own homes... They will not fail; we cannot allow them to fail.”