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Fannie, Freddie Sink Anew on Bailout Worries

A Barron's article over the weekend that said investors could be 'wiped out' in a bailout amped up jitters.

Shares of

Fannie Mae

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and

Freddie Mac

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each tumbled more than 18% Monday morning as investors worried that they would get burned by a government bailout of the troubled mortgage buyers.

Fannie dropped as much as 18.2% to $7.05 and Freddie slipped as much as 19.1% to $4.73, after a report in

Barron's

over the weekend stoked investor fears that their holdings would be "wiped out" or significantly devalued due to a government bailout. The value of some of the companies' debt, which has the most risk of loss if the government steps in, fell to a record low against similar bonds, according to

Reuters

, and Freddie's issuance of new debt had much weaker demand than in recent weeks.

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Executives from Fannie and Freddie, as well as Treasury Secretary Henry Paulson, have said repeatedly that there are no plans to change how the government-sponsored enterprises, or GSEs, operate. Treasury spokeswoman Jennifer Zuccarelli declined to comment on the article during a news briefing Monday, but reiterated Paulson's message.

"As the secretary said many times before, we have no plans to use the authority that we've been given, so I'm not going to comment on any speculation," Zuccarelli said.

The

Federal Reserve

has already opened its discount window for the mortgage giants, which have posted tens of billions worth of losses over the past year as the housing market soured. Fannie and Freddie have not yet accessed that capital. Regulators have also sought approval for a plan to inject billions of dollars in capital back into the companies through investments and loans.

If such a plan is approved, it is unclear whether Fannie and Freddie will be nationalized or maintain their current form as shareholder-owned enterprises whose mortgage purchases are guaranteed by the government to provide liquidity in the housing market. The GSEs hold $5 trillion in housing debt, nearly half of the U.S. market.

Barron's

noted that both firms' shares have dropped more than 90% over the past year, with their devalued assets and equity perhaps placing each "around $50 billion in the hole." While Fannie has raised billions in stock sales already and both firms have cut their dividends to shore up capital levels, regulators are pushing for Fannie and Freddie to raise more funds, although Barron's says the likelihood of success is bleak.

Fannie CEO Dan Mudd seemed confident during a recent earnings call, stating that the company will "still continue to make that mission and business model work."

Nonetheless, Merrill Lynch analyst Kenneth Bruce lowered his price target on Freddie shares to $5.75 from $7, citing "poor visibility into its future credit results and the uncertainty of any policy response." That uncertainty is making it difficult for Freddie to assess its capital adequacy and the need for new stock issuance.

"We do not anticipate a sustained recovery in

Freddie shares until there is better visibility into these inter-related issues," Bruce wrote.