The Fed and the US Treasury are willing to lend money and buy shares just to stabilize the two pillars of the American housing market.
Nonetheless, efforts by the government to save the couple seem not enough to boost investors' confidence. Wall Street continues to sag. Shares of Fannie Mae fell 5.1% to US$9.73 per share, while those of Freddie Mac slid 8.3% to US$7.11 per share, both in NYSE trading last Monday (July 14).
From the website of www.slate.com:
As of yesterday's close, Fannie Mae had a market capitalization of about $13 billion and Freddie Mac was worth about $5 billion. Given the massive size of their portfolios and the potential for losses, it's clear they will need to raise sums that may equal or dwarf their current market capitalizations. Given the firms' distressed state, buyers would certainly demand a discount. As J.P. Morgan CEO Jamie Dimon said in his now-famous formulation about Bear Stearns, "Buying a house is not the same as buying a house on fire." Fannie Mae and Freddie Mac are houses on fire. And this mentality leads to a vicious cycle: Investors jump ship because they fear dilution, and the more the stock slips, the more dilute capital-raising becomes.
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