NEW YORK (Reuters) – A firestorm of anxiety over the ability of U.S. mortgage giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) to get the capital they need to survive sent their debt and stocks plummeting on Thursday.
Stoking concerns, former St. Louis Federal Reserve President WilliamPoole said the two major U.S. mortgage finance companies were"insolvent" and may need a U.S. government bailout, according toBloomberg News.
The outlook was so dire that Bush administration officials weremeeting with regulators to discuss contingency plans should they beunable to raise funds and support the worst housing market since theGreat Depression, according to a report in the Wall Street Journal.
Yield spread premiums for the larger Fannie Mae rose to the highestsince the days before the Federal Reserve’s orchestrated bailout ofBear Stearns Cos in March.
Shares in both companies plunged to their lowest since 1991.
The government-sponsored enterprises, or GSEs, are expected to needbillions of dollars in capital to support their balance sheets to tryto stabilize the mortgage market. They found strong demand as theyraised some $20 billion since last fall, but the instability in shareprices since raises doubts about new investor support.
"This is not an opportune time to have to increase liquidity withthe stocks down so much," said Alan Lancz, president of investmentadvisory firm Alan B. Lancz & Associates in Toledo, Ohio. "Thesedilutive deals these companies are putting together are just increasingthat downward spiral within the financials, not even to mention theconfidence in the whole system."
Mounting doubts over the ability of the companies led Deutsche Bankanalyst Mustafa Chowdhury, a former Freddie Mac executive, on aWednesday conference call to float the possibility that share pricescould go below $5.
For the debt, much depends on the continued support of foreigncentral banks that have been loading up on the companies’ $1.6 trillionin outstanding debt, a Deutsche Bank trader said on the call.
"If you are going to bail out Bear Stearns, the Congress is going tosupport Fannie and Freddie," said Andrew Brenner, co-head of structuredproducts at MF Global in New York.
Yields on 10-year bonds issued by Fannie Mae and Freddie Macballooned 10 basis points to more than 1 percentage point abovegovernment debt. They had been quoted as much as 12 basis points widerthan late Wednesday.
Five-year credit default swaps on Fannie Mae widened by about 5basis points to nearly 82 basis points, or $82,000 a year to protect$10 million of debt, while Freddie Mac’s swaps widened by about 2 basispoints to about 82 basis points.
Poole’s remarks intensified traders’ fears about the financial soundness of Fannie Mae and Freddie Mac.
The mortgage-backed securities issued and guaranteed by the GSEswere more insulated since payments on the issues flow directly fromhomeowners to investors.
Early weakness in the "agency" debt market spilled into other partsof the bond market. Interest rate swap spreads grew anywhere from 0.50basis points to 1.50 basis points.
(Additional reporting by Richard Leong, Dena Aubin and Deborah Jian Lee; Editing by Tom Hals)
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