Fannie, Freddie stocks and bonds plummet

A firestorm of anxiety over the ability of U.S. mortgage giants Fannie Mae and Freddie Mac to get the capital they need to survive sent their debt and stocks plummeting on Thursday.

Stoking concerns, former St. Louis Federal Reserve President William Poole said the two major U.S. mortgage finance companies were "insolvent" and may need a U.S. government bailout, according to Bloomberg News.

The outlook was so dire that Bush administration officials were meeting with regulators to discuss contingency plans should they be unable to raise funds and support the worst housing market since the Great Depression, according to a report in the Wall Street Journal.

Yield spread premiums for the larger Fannie Mae rose to the highest since the days before the Federal Reserve's orchestrated bailout of Bear Stearns Cos in March.

Shares in both companies plunged to their lowest since 1991.

The government-sponsored enterprises, or GSEs, are expected to need billions of dollars in capital to support their balance sheets to try to stabilize the mortgage market. They found strong demand as they raised some $20 billion since last fall, but the instability in share prices since raises doubts about new investor support.

"This is not an opportune time to have to increase liquidity with the stocks down so much," said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates in Toledo, Ohio. "These dilutive deals these companies are putting together are just increasing that downward spiral within the financials, not even to mention the confidence in the whole system."

Mounting doubts over the ability of the companies led Deutsche Bank analyst Mustafa Chowdhury, a former Freddie Mac executive, on a Wednesday conference call to float the possibility that share prices could go below $5.

For the debt, much depends on the continued support of foreign central banks that have been loading up on the companies' $1.6 trillion in outstanding debt, a Deutsche Bank trader said on the call.

"If you are going to bail out Bear Stearns, the Congress is going to support Fannie and Freddie," said Andrew Brenner, co-head of structured products at MF Global in New York.

Yields on 10-year bonds issued by Fannie Mae and Freddie Mac ballooned 10 basis points to more than 1 percentage point above government debt. They had been quoted as much as 12 basis points wider than late Wednesday.

Five-year credit default swaps on Fannie Mae widened by about 5 basis points to nearly 82 basis points, or $82,000 a year to protect $10 million of debt, while Freddie Mac's swaps widened by about 2 basis points to about 82 basis points.

Poole's remarks intensified traders' fears about the financial soundness of Fannie Mae and Freddie Mac.

The mortgage-backed securities issued and guaranteed by the GSEs were more insulated since payments on the issues flow directly from homeowners to investors.

Early weakness in the "agency" debt market spilled into other parts of the bond market. Interest rate swap spreads grew anywhere from 0.50 basis points to 1.50 basis points.