Fannie, Freddie: Plunge then rebound

Worries about government takeover send shares sharply lower in early trading, but both recover most of early losses.

By Chris Isidore, CNNMoney.com senior writer
Last Updated: August 21, 2008: 4:10 PM EDT

NEW YORK (CNNMoney.com) -- Shares of mortgage finance giants Fannie Mae and Freddie Mac plunged and then came back on Thursday after new reports that the federal government may have to take over the troubled firms.

Fannie fell as much as 87 cents or 20%, to $3.53, but then rebounded to a 10.2% gain by the end of the session. Freddie shares tumbled as much as 99 cents, or 30%, to a record low before rebounding to a 2.8% loss. The lows of the day represented a 20-year low for Fannie (FNM, Fortune 500) when adjusted for splits, and a record low on that basis for Freddie (FRE, Fortune 500), which started trading in 1989.

The Wall Street Journal Thursday said that the firms needed to refinance $225 billion in mostly short-term debt by the end on September. Concerns about the firms' ability to refinance the debt had prompted Treasury Department officials to begin developing a series of options to shore up the companies, if necessary.

The two shareholder-owned firms were originally set up by the federal government to provide financing to the mortgage market. Today they are the primary source of funding for banks and other home lenders, and they own or guarantee more than $5 trillion in mortgages. But both have reported large losses due to rising foreclosures and declining home prices on the loans they own or back.

Earlier this summer, Treasury Secretary Henry Paulson secured congressional authority to lend the firms an unlimited amount of money if necessary, as well as the ability to have the government buy shares in the two firms. It is widely expected that such a move would wipe out the holdings of current shareholders.

Paulson and executives of the firms have continued to insist that they don't expect such moves to be necessary, as they have stated that both firms have capital in excess of levels required by regulators to cover their expected future losses. But the investors have not been convinced, sending shares down more than 60% in the first three trading days of this week alone. Shares have now lost nearly 90% year-to-date.