By Michael Tsang
July 12 (Bloomberg) -- Some investors in Fannie Mae and Freddie Mac suffered their worst single-day loss ever yesterday. Others may have doubled their money.
The biggest sources for U.S. home-mortgage financing seesawed in the heaviest trading on record as investors wagered whether the two largest buyers of U.S. home loans would collapse.
Fannie and Freddie, which own or guarantee almost half the $12 trillion of home loans in the U.S., plunged as much as 49 percent and 51 percent in early trading yesterday, the biggest intraday losses since Bloomberg began compiling data. They tumbled as concern escalated that a failure will force the government to rescue both companies and wipe out shareholders.
Shares of the government-chartered companies bounced back from their lows after U.S. Treasury Secretary Henry Paulson said the government has no plans to take over Fannie and Freddie and that they should continue as shareholder-owned entities. They then rallied after Citigroup Inc. recommended that their clients buy the shares and Senator Christopher Dodd said that direct borrowing from the Federal Reserve may be one option.
``I hate days like this to trade,'' said Joseph Saluzzi, the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. ``You don't really know what's going on.''
Freddie closed at $7.75 after falling as low as $3.79 and rising as high as $8.63. The closing price represented a 99 percent advance from its intraday low. Fannie ended at $10.25 after dipping as low as $6.68 and climbing as high as $11.89.
Heaviest Trading
Trading was the most on record for both companies. For Fannie, volume eclipsed 400 million shares, 23 times more than the daily average over the past year and the most since at least July 1980, according to data compiled by Bloomberg. More than 397 million shares of Freddie changed hands, the heaviest since at least December 1988, the data showed.
Fed spokeswoman Michelle Smith said after the close of trading yesterday the central bank hasn't held talks with Fannie or Freddie about borrowing from its so-called discount window.
Reuters reported Chairman Ben S. Bernanke told Freddie's Chief Executive Officer Richard Syron that the two government- chartered companies could take advantage of the discount window.
The discount window offers direct loans to commercial banks at an interest rate that's now 2.25 percent, a quarter point above the Fed's benchmark rate. Bernanke opened it to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis.
Capital Levels
Fannie, based in Washington, has slumped 74 percent this year, while Mclean, Virginia-based Freddie has lost 77 percent of its stock market value. Investors have pummeled the shares on concern that they don't have enough capital to weather the worst U.S. housing slump since the Great Depression.
``The financial system is under extreme stress,'' said David Chalupnik, who helps oversee about $62 billion at First American Funds in Minneapolis. ``Credit market losses have continued to ramp up a lot higher than people thought.''
Bradley Ball, the New York-based Citigroup analyst that covers Fannie and Freddie, reiterated his ``buy'' rating on the shares yesterday, saying the sell-off reflected ``market fears,'' not earnings prospects or valuations. Freddie's management told Ball in a meeting yesterday that there was no significant change in its financial condition during the second quarter, he said.
Congressional Charter
Congress created Freddie and expanded Fannie in 1970 to promote home buying in the U.S. The companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.
The companies have raised a combined $20 billion since December to cover losses of more than $11 billion generated since the credit crisis began last year. On July 9, Fannie raised $3 billion selling two-year notes after paying a record yield over U.S. Treasuries of similar maturity. Freddie has yet to raise a planned $5.5 billion, scheduled for mid-year.
Freddie is ``insolvent'' under fair value accounting rules, according to former St. Louis Federal Reserve President William Poole. The company owed $5.2 billion more than its assets were worth in the first quarter, Poole said last week. Fannie's liabilities may exceed assets next quarter, after the fair value its assets fell 66 percent to $12.2 billion, he said.
Fannie, the larger of the two mortgage finance companies, said yesterday that it has ``ample sources of liquidity.''
``The problem is we still don't know what's on those balance sheets, what the valuation is and if there's any equity left after those assets are marked to market,'' said Walter ``Bucky'' Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. ``The stocks are telling us that there'll be little if anything for existing shareholders.''
To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net.
Last Updated: July 12, 2008 00:02 EDT
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