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Fannie, Freddie Stabilize on Pledge of Government Support

By Jerry Ascierto

Fannie Mae and Freddie Mac tentatively regained their footing after a wild week that saw their stock prices tumble to 16-year lows.

Investor confidence in the government-sponsored enterprises (GSEs) was significantly down last week on concerns that Fannie Mae and Freddie Mac would become insolvent as the housing downturn drags on and their ability to raise capital grew compromised. But a pledge of government support over the weekend, and a successful securities offering on Monday by Freddie Mac have eased those concerns.

Many believe the investor panic of last week, which caused shares of the GSEs to lose nearly half their value, was overstated. "No question it's an overreaction. They're well capitalized," Rep. Barney Frank, chairman of the House Financial Services Committee, told Hanley Wood on Friday. "The market is rational in the long run but not always in the short run."

The GSEs, which own or guarantee about $5.2 trillion of U.S. home mortgages, received a few boosts of confidence since last Friday, which seemed to restore investor confidence.

Over the weekend, Treasury Secretary Henry Paulson announced that the Treasury has asked Congress for the authority to extend the GSEs line of credit, as well as purchase equity stakes in the companies if needed. A third component of the plan would strengthen GSE oversight by giving the Federal Reserve a consulting role in the regulation of the two companies.

After the government's pledge of support, another shot in the arm came Monday when the market reacted favorably to a Freddie Mac auction of $3 billion in short-term securities. The auction was highly anticipated; many feared that a lack of investor interest would deepen the level of panic on Wall Street.

But more investors showed up for this auction than had for any other offering in at least six months. Freddie Mac sold $2 billion in three-month securities as part of a routine, weekly debt auction, and $1 billion in six-month securities. The bid-to-cover ratio, which measures the amount of bids against the number of bids accepted, was 4.16 for the three-month notes, the highest ratio since last October. And the bid-to-cover ratio for the six-month notes was 3.73, the highest level since January.

On Monday, Fannie Mae and Freddie Mac shares were up more than 30 percent in pre-market trading, though those gains grew much more modest after the bell rang, with Fannie up 1.9 percent to $10.44, and Freddie up 2.7 percent to $7.96 by mid-morning.