Fannie, Freddie Continue to Falter (Update3)

Updated from 11:03 a.m. EDT.

Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) continued their freefall Friday, amid mounting concerns the government would have to bail out the faltering mortgage giants.

Shares of the two government-sponsored entities shed more than 40% in early trading, as investors worried that if the government did step in, investors would be decimated. The New York Times reported Friday that Bush administration officials were considering placing the companies in conservatorship, which would strip the value of the stocks and put the responsibility for losses on mortgages they own on the American taxpayer.

The story was later refuted by both federal officials and Freddie Mac, which said in a statement issued after the closing bell that it expects to report a "substantial" capital cushion well over the 20% required by its main regulator, the Office for Federal Housing Enterprise Oversight, when it finalizes its second-quarter results.

"Freddie Mac is adequately capitalized, highly liquid and an essential part of the nation's housing system," the statement said.

Treasury Secretary Henry Paulson said the Bush administration was "maintaining a dialogue with regulators and with the companies" and noted "OFHEO will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission."

"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission," Treasury Secretary Henry Paulson said in a statement issued Friday morning.

Freddie shares closed down 3.1% to $7.75 and Fannie shares finished 22.4% to $10.25. Freddie shares briefly turned positive after Sen. Chris Dodd (D., Conn.) said officials were considering various options for helping the firms, including allowing them to borrow from the Federal Reserve's discount window.