Rumors of Fannie Mae, Freddie Mac bailouts drag Dow down sharply

The Dow Jones industrial average briefly sank below 11,000 and shares of the two companies each lost about half their value before recouping part of their losses after Treasury Secretary Henry M. Paulson Jr. tried to dampen rumors of government intervention.

News reports this morning said the government was considering placing one or both of the mortgage giants in a conservatorship -- in effect, initiating a government takeover.

Shares of the companies have sunk this week over concerns that the companies would have to raise billions of dollars in capital to offset huge expected losses stemming from rising mortgage defaults. Investors worry that the companies wouldn't be able to gather all they need from private investors, necessitating a government rescue.

For the second straight day, Paulson sought to combat that speculation, saying that the Bush administration's "primary focus is supporting Fannie Mae and Freddie Mac in their current form."

President Bush held a previously scheduled meeting with his economic advisors and said he had been briefed on the situation around the two mortgage holders.

"Freddie Mac and Fannie Mae are very important institutions," the president said afterward. Paulson "spent a fair amount of time discussing these institutions. He assured me that he and [Federal Reserve chief] Ben Bernanke will be working this issue very hard."

In midday trading, shares of Fannie Mae tumbled $3.25, or 25%, to $9.95. Freddie shares were down $2.18, or 27.3%, to $5.82.

Fannie Mae and Freddie Mac were chartered by the government but are private companies with publicly traded stocks. They buy or guarantee home loans and mortgage securities, and together stand behind almost half of the nation's mortgage debt.

Their importance to the housing market has only increased in the last year as banks and others who backed mortgages have pulled back after suffering deep losses on subprime home loans.

Since late last year, Fannie Mae has raised more than $15 billion and Freddie Mac has raised $6 billion with plans for $5.5 billion more, said Richard Hofmann, an analyst at research firm CreditSights Inc. But the plunge in the stocks makes it difficult to draw cash from private investors. And any capital raising would further dilute the ownership stakes of existing investors.

Financial companies have raised more than $320 billion in capital in the last year, but many of the investors have lost money as the stocks have continued to slide. That has raised doubts about whether companies can raise billions more.

Concerns about Fannie and Freddie were stoked Thursday in part by comments from William Poole, former president of the Federal Reserve Bank of St. Louis, who said the firms were "insolvent" and might need government help.

Reynolds reported from Washington and Hamilton from New York.

walter hamilton@latimes.com

maura reynolds@latimes.com