Fannie, Freddie shares dive on bailout fears, bonds up

NEW YORK (Reuters) - Fannie Mae and Freddie Mac shares plunged to their lowest levels in almost 20 years on Wednesday, while the mortgage companies' bonds rallied on the belief that an increasingly likely government bailout would wipe out shareholders but secure their massive debt.

U.S. Treasury and Freddie Mac officials met to discuss how the company can best weather the current economic woes in light of mounting credit losses, sources familiar with the meeting said, but neither Treasury nor Freddie Mac officials would comment on details.

"As you would expect, we have been in communication with the companies for months to receive updates and we've been communicating with their regulator and the Federal Reserve," Treasury spokeswoman Jennifer Zuccarelli said.

Wednesday's meeting was one of several since mid-July when the U.S. Congress approved a plan to provide any necessary extra funding for both Fannie Mae and Freddie Mac.

Anxiety about the companies has risen this week following a report in Barron's newspaper that government officials may have no choice but to go ahead and effectively nationalize Fannie and Freddie as rising defaults on home mortgages undermine the value of their assets.

Freddie Mac's stock slumped 22 percent to $3.25, after falling to the lowest level since 1990, and Fannie Mae shares slid nearly 27 percent to $4.40, after hitting the lowest level since 1988.

"We continue to be concerned about what dilution would be required to stabilize Fannie and Freddie, and what that would leave over for existing shareholders," said Marshall Front, chairman of investment firm Front Barnett Associates in Chicago.

But the debt of Fannie Mae and Freddie Mac rallied, as bond investors believe the government will do whatever it takes to maintain confidence in the two companies, since their ability to issue debt, and use the proceeds to help fund U.S. home buyers, is critical to pulling U.S. housing out of its worst slump since the Great Depression.

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Fannie, Freddie shares dive on bailout fears, bonds up

Fannie, Freddie shares dive on bailout fears, bonds up

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