Capital Fears Sink Fannie, Freddie (Update2)

The government-sponsored mortgage giants are 'insolvent,' former St. Louis Fed President William Poole tells Bloomberg.
Publish date:

Updated from 10:57 a.m. EDT.

Shares of

Fannie Mae



Freddie Mac


plummeted anew on Thursday, after a former

Federal Reserve

official labeled them "insolvent" and top government officials increased their fretting about the government-sponsored mortgage giants.

The two stocks have been hammered this week, as concerns about their liquidity position in the face of rising foreclosures have mounted. Foreclosure filings in the U.S. grew by more than 50% in June vs. a year ago, according to RealtyTrac. Fannie shares have lost 30% since the July 3 close, while Freddie's shares have plummeted 45%.

Ex-St. Louis Fed President William Poole did not help matters in an interview published by


on Thursday, in which he said the government may need to bail out the two companies.

"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole told the wire service.


The Wall Street Journal

reported on Thursday that the Bush administration had intensified talks about what the government could -- or should -- do if the companies become unable to raise more money or continue doing business. The government, however, does not expect Fannie and Freddie to fail, the paper said.

In testimony to the House Financial Services Committee, Treasury Secretary Henry Paulson sought to settle nerves about the two companies, pointing out that James Lockhart, director of their main regulator, the Office for Federal Housing Enterprise Oversight, earlier this week said they were

adequately capitalized


"Fannie Mae and Freddie Mac are also working through this challenging period," Paulson said in the testimony, which focused on the Bush administration's efforts to overhaul the regulatory framework for financial markets. "They play an important role in our housing markets today and need to continue to play an important role in the future."

Fannie shares closed down 13.8% $13.20, while Freddie shares finished down 22% to $8.

Lockhart issued a statement after Thursday's closing bell, in which he reiterated the two companies were "adequately capitalized" and said OFHEO "continues to monitor closely Fannie Mae, Freddie Mac and the mortgage and financial markets."

"As one would expect, we are carefully watching the Enterprises' credit and capital positions," he said.

This article was written by a staff member of