Stock fall sharply on Fannie, Freddie worries

Posted July 11, 2008

— Wall Street sank further into a bear market Friday as investors dumped stocks in response to troubles at mortgage companies Fannie Mae and Freddie Mac and oil's continuing climb into record territory. The Dow Jones industrials fell more than 200 points and slid below the 11,000 mark for the first time in two years.

Investors appeared unimpressed by a statement from Treasury Secretary Henry Paulson, who said the government's focus is ensuring that Fannie Mae and Freddie Mac remain as presently constituted to carry out their mission. Some investors had been hoping that the government would announce plans to take over one or both of the companies.

"There are rumors that the Bush administration is willing to essentially take over those two agencies," Mike Walden, an economist at North Carolina State University, said. "That would be a blockbuster announcement."

The government-chartered companies have fallen sharply in recent days on worries about their stability. Wall Street is worried that a collapse of the two financiers would cause further shock to the financial system, and trigger more losses to banks and brokerages with significant holdings of mortgage-backed securities.

"If there's some interruption in the operation of Frannie Mae and Freddie Mac, this could stall people's ability to get mortgages and houses to sell, which of course, is at the root of the problems we have in the economy right now," Walden said.

The well-being of Fannie Mae and Freddie Mac is crucial, because they hold or guarantee about $5 trillion worth of mortgages - roughly half the $9.5 trillion debt of the United States.

"One analyst said they provide the grease for the mortgage market," Walden explained. "They're in place to buy mortgages from banks and then sell them to investors; they enjoy an investment advantage.

"So if they shut down, we could have big, big, big kinds of problems in the mortgage and housing markets."

Walden said he expects that government action to save the companies is only a question "of how much and to what degree." If the federal government took over the companies, then their $5 trillion debt would be added to the national debt.

"One thing this could mean is a bigger national debt and more interest payments from the debt down the road," Walden said.

Fannie Mae and Freddie Mac's troubles are just the latest depressing turn in a year-old credit crisis that shows no sign of ending, disappointing some stock traders who thought just months ago that the worst was perhaps over.

Global banks and brokerages have scrambled to sell assets and raise capital in an effort to offset nearly $300 billion of write-downs linked to the credit crisis. Citigroup Inc. announced Friday it will sell its German retail banking operation to France's Credit Mutuel for $7.7 billion.

Investors also had little reason to shop for bargains Friday because many financial companies are reporting results next week and are expected to announce another round of big write-downs.

Meanwhile, oil continued its ascent on supply concerns. A barrel of oil vaulted to a record above $147, raising more concerns about the weight of higher prices on inflation and in turn, the overall economy.

The confluence of negative news offset a mostly positive quarterly report from General Electric Co. The conglomerate that owns everything from television network NBC to jet engine plants reported second-quarter profits that met analysts' expectations. However, the outlook across its business lines was mixed.

"You have two issues, crude popped back up $10 to $11 in the last few days, and that is causing some concern. The second point is the financial services sector, there is concern and speculation that Freddie, Fannie and Lehman won't be around on Monday. That's obviously causing worry," said Phil Orlando, chief equity market strategist at Federated Investors.

In late morning trading, the Dow fell 224.06, or 2.00 percent, to 11,004.96 after having fallen to 10,980.37. It last traded below 11,000 on July 25, 2006.

Broader stock indicators also skidded lower. The Standard & Poor's 500 index fell 23.29, or 1.86 percent, to 1,230.10, and the Nasdaq composite index fell 36.97, or 1.64 percent, to 2,220.88.

Friday's drop meant Wall Street moved squarely into a bear market, which is defined as a 20 percent drop from a recent peak. At its low today, the Dow was down 22.5 percent from the record high of 14,198.09 it reached in October. The S&P 500 was down 21.6 percent and the Nasdaq fell 22.6 percent.

Oil, meanwhile, extended its move into record territory, rising as high as $147.27. At midday, light, sweet crude traded up $2.44 at $144.09 a barrel on the New York Mercantile Exchange amid tensions between the West and Iran and the potential for attacks on Nigerian oil facilities.

Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.88 percent from 3.80 percent late Thursday. The dollar was mixed against other major currencies, while gold prices rose.

Orlando said investors are looking to Federal Reserve President Ben Bernanke and Paulson for guidance.

"It feels like that Friday before the big Bear Stearns/JPMorgan announcement, so you're wondering if Bernanke and Paulson are going to sit around on the weekend trying to figure things out," Orlando said, referring to the near-collapse and subsequent Fed-orchestrated buyout of Bear Stearns.

"It seems all the confidence in the market has dissipated in these key financial services companies. When you talk about too big to fail, the government has to step in to figure out a solution to the Fannie and Freddie confidence issue," he said.

Freddie Mac fell $1.75, or 22 percent, to $6.25, while Fannie Mae tumbled $3.31, or 25 percent, to $9.89 as investors worried about their stability. Piper Jaffray analyst Robert Napoli lowered his price targets on both companies, and said in a note to clients investors should "not be in a position that only two government-sponsored lenders are willing to make mortgage loans and, without them, our economy would collapse."

Lehman Brothers Holdings Inc. fell $3.20, or 18.5 percent, to $14.10 as traders fretted that the No. 4 investment bank will succumb to soured debt.

Citi slipped 41 cents, or 2.5 percent, to $15.87 after saying it will book a $4 billion gain from the sale of its German retail operation. The deal is part of a plan by Chief Executive Vikram Pandit to sell up to $500 billion in assets to help boost profitability.

Investors remain cautious about the entire financial sector, especially ahead of second-quarter reports due next week from major names like JPMorgan Chase & Co. and Merrill Lynch & Co. JPMorgan declined $2.09, or 6.1 percent, to $32.42 and Merrill fell $1.70, or 5.9 percent, to $27.01.

In economic news, the United States' trade deficit narrowed in May as exports - including industrial supplies and consumer goods - climbed to all-time highs. The Commerce Department said growing exports drove the trade gap down to $58.8 billion, a 1.2 percent decrease from April and the best showing since March.

Investors did get a better-than-expected reading on consumers. The Reuters/University of Michigan Consumer Sentiment index rose to 56.6 for July from 56.4 in June. It had been expected to decline.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 722.6 million shares.

The Russell 2000 index of smaller companies fell 7.04, or 1.04 percent, to 663.46.

Overseas, Japan's Nikkei stock average fell 0.21 percent. Britain's FTSE 100 fell 1.54 percent, Germany's DAX index declined 2.41 percent, and France's CAC-40 fell 3.09 percent.


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  • chfdcpt Jul 11, 2008

    If my memory does not get hit with CRS, I remember in the 70's when the oil went up, so many layoffs, so many companies moving overseas, so many business failures. My parents remembered some of those before those times. I guess it is called economic cycles. The problem is that the circus clowns and the insane asylum at DC are more concerned with getting re-elected than doing what is right for our country.

    And before we lay the blame on the republicans or democrats, remember that the president has virtually no power. It all has to be authorized by the congress (the opposite of progress). The buget, appointments to courts/federal da's/ambassadors, judges/budgets/declaration of wars/providing for whatever must be authorized by congress.

    Also remember that everytime that we hear the cirus yelling how the "rich should pay their fair share of the taxes" keep this in mind. How many senators are millionaires? About half of them.

  • BULLDOZER Jul 11, 2008

    Hey, it's a great day to make an investment in your 401 k or mutual fund. When the market bounces back( and it will) your bottom line will benefit. Everyone needs to relax. This will pass.

  • wildervb Jul 11, 2008

    I believe that one completely unreported reason for the housing downturn and resulting credit crunch is the stagnation of American wages. We've been shipping high paying jobs overseas, people still have jobs, but those jobs don't pay as well. People are slowly getting squeezed, they can no longer afford to pay their mortgages.

  • APPMAN Jul 11, 2008

    Regardless of which party is in office, this is really bad, and makes for scary times for all of us.

  • wildervb Jul 11, 2008

    whatelseisnew, I will admit that there is plenty of blame to go around from both sides of the aisle. The politicians wanted this housing bubble gravy train to continue, that way they could take credit for the booming economy and the ownership society. The Federal Reserve should have stepped in much earlier and raised rates sooner. Funny, it was only a couple of years ago that Greenspan was urging borrowers to take on adjustable rate loans.

  • whatelseisnew Jul 11, 2008


    Yes absolutely, the presidents and whatever neo-cons are forced people at gun point, to run up personal debt, live beyond their means, get mortgages they could not afford, and not save any money. The dolts up in Washington set the table; the piggies (meaning Americans) slopped down at the trough until OH NO, the trough is empty. The enemy is us my friend. We can blame all the politicians and the greedy people that got rich, but they were not the ones signing for loans that could not be paid back.

  • whatelseisnew Jul 11, 2008


    Hmm do you think perhaps Congress in it's oversight role has more to do with this? And no I am not just referring to the current congress, the prior one. A lot of the lending regulations were relaxed to, yes you guessed it; get more people into homes. Never mind that the rules were made so lax that you could get a mortgage without having to show income; we wanted to get more people into homes. I am really starting to wonder if an all out collapse is on it's way.

  • motorfinga Jul 11, 2008

    Raygun revolution is in full swing. It was Ronnie who introduced the theory of driving the economy into a train wreck to force the public into accepting letting go of all social programs that helped the people, so that money can be funneled to the rich and corporations in social reform for them, and used to control more of the world by using Americas military might , just as its outlined by PNAC. We are in the midst of the Reagan Revolution , make Americans indentured slaves, and the few wealthy elite will live high on the hog. Its the Neo Con dream world coming to life. I think its also referred to somewhere as the Apocalypse. The difference is that in that book, they say there are 4 horsemen bringing doom and gloom. In our real life version , we have thousands known as Neo Cons.

  • tomm175 Jul 11, 2008

    I may sound really stupid right now, but that is the risk I take.... lol Why are "analysts" continuing to spread shortage fears on oil and what not when its been shown over and over again that there is no shortage?

  • motorfinga Jul 11, 2008

    Thank you Bush/Cheney criminal junta and The Republican Crime Syndicate in congress!!!