WASHINGTON — The Bush administration scrambled Friday to calm speculation that the government would be forced by the housing crisis to take over Fannie Mae and Freddie Mac, but shares of the mortgage giants tumbled anyway and yanked down the overall stock market in volatile trading.
The companies lost half their market value early Friday after reports said the government was considering a takeover of the firms and was prepared for shareholders to be wiped out. The stocks rebounded after Treasury Secretary Henry M. Paulson Jr. said the Bush administration's "primary focus is supporting Fannie Mae and Freddie Mac in their current form."
Fannie Mae ended down $2.95, or 22%, at $10.25. Freddie Mac closed at $7.75, down 25 cents, or 3.1%.
The stocks sank earlier in the week on fears that the companies would have trouble raising billions of dollars in capital to offset huge expected loan losses. The companies ended Friday with a combined stock market value of $15 billion, down $12.7 billion in five days.
The Dow on Friday closed down 128.48 points, or 1.1%, at 11,100.54. At one point it traded below 11,000 for the first time in two years; at another point it was showing a gain for the day.
Several months after many thought the financial system was well on its way to recovering from the mortgage meltdown and resulting credit crisis, worries about Fannie Mae and Freddie Mac showed that "the credit crunch, far from being over, has a lot more chapters to play out," said Kingman Penniman, head of KDP Investment Advisors Inc. in Montpelier, Vt. "It's a crisis of confidence, and it shows how fragile that confidence can be."
Fannie Mae and Freddie Mac 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 that financed mortgages have pulled back after suffering deep losses on subprime home loans.
The woes of Fannie and Freddie may make it more likely that scores of large banks and brokerages also will need to raise billions of dollars in capital.
"This additional turmoil in the mortgage market could put further pressure on financial institutions around the world," Penniman said.
The fate of Fannie and Freddie was the topic du jour in Washington.
"Freddie Mac and Fannie Mae are very important institutions," President Bush said after holding a previously scheduled meeting with his economic advisors. The Treasury secretary, the president added, "assured me that he and [Federal Reserve Chairman] Ben Bernanke will be working this issue very hard."
It was clear the government was weighing various options should the mortgage holders fall into deeper distress.
In a news conference, Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said one option under consideration was to permit Fannie Mae and Freddie Mac to borrow money directly from the Federal Reserve through its so-called discount window.
"I don't want to suggest they've drawn any conclusions yet about it, but they are certainly examining what other means might be taken in order to shore up a situation should it become necessary," Dodd said.
Fannie and Freddie shares jumped late Friday, putting Freddie Mac briefly in positive territory, on a news report that Bernanke had told the companies they could borrow directly from the central bank. But after the market closed, a Fed spokeswoman told Bloomberg News that the Fed had had no discussions with Fannie and Freddie about direct loans.
Dodd and Sen. Charles E. Schumer (D-N.Y.), chairman of Congress' Joint Economic Committee, offered reassurances.
"Fannie and Freddie are too important to fail. Their fundamentals, as they look now, provide no reason to think they will fail," Schumer said on the Senate floor. "These two institutions are the foundation of the American mortgage market, and we stand fully behind them and their crucial role."
"The facts are that these are sound, solid institutions with more than necessary capital today that the law would require," Dodd said.
If the companies do get into deeper trouble, the government will help them get back on their feet one way or another, said Alex Pollock, former chief executive of the Federal Home Loan Bank of Chicago.
Analysts said the government could intervene by putting the companies in conservatorship, buying up their stock or issuing debt guarantees.
Fannie's and Freddie's woes have increased pressure on Congress to finalize details of a housing rescue bill that includes tougher oversight of the mortgage giants.
Late Friday, the Senate, on a 63-5 procedural vote, sent to the House its version of the bill, which senators approved this month.