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.
