Fannie, Freddie fears drag down US shares

19 August 2008

Shares in Fannie Mae and Freddie Mac have fallen sharply, on increasing speculation that the lenders will soon be bailed out by the federal government.

The troubled government-sponsored mortgage firms have been hit by a report from financial news source Barron's, which was sceptical of the pair's chances of surviving unassisted.

Citing an anonymous source familiar with the situation, the report suggested that the firms were struggling to raise enough money to keep themselves going, and would therefore turn to the government for funding.

Earlier this year, the Treasury secured new legislative powers to lend the lenders unlimited amounts of money.

This is because the consequences of either firm failing would be catastrophic for the US economy - as they collectively hold over half of the nation's $5 trillion mortgage debts.

Shares in Fannie fell 22 per cent yesterday, while Freddie also dropped 25 per cent.

Commenting on the share falls to the BBC, John Merrill at Tanglewood Wealth Management said: "The degree and depth of what's happening in the financial industry is beyond anything we've seen in decades and it takes time to get your arms around the severity of what's happening and what the long-term and short-term ramifications are."

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