Bail-out fears rattle US shares

Q&A: Freddie Mac and Fannie Mae

Shares in US mortgage finance giants Freddie Mac and Fannie Mae have plunged again on fears that the government will be forced to bail out the pair.

The slide reignited concerns about the health of the financial sector and sent the US stock market sharply lower.

A report by US financial weekly Barron's suggested that the chances of a government rescue were increasing.

However, the Treasury said that it had no plans bail out the two firms, which underpin the US mortgage market.

The Treasury gained the authority to bail out the Freddie Mac and Fannie Mae, including buying shares in the two companies if needed, in a rescue plan approved at the end of July.

The degree and depth of what's happening in the financial industry is beyond anything we've seen in decades John Merrill, Tanglewood Wealth Management

Citing an unidentified source, Barron's said US officials anticipated that the two firms would not be able to raise the money they needed to improve their financial footing.

The paper said a government bail-out would likely wipe out existing holders of the firms' shares. Both firms were trading near 18-year lows.

Stocks rattled

Shares of Fannie Mae fell more than 22%, or $1.76, to close at $6.15. Shares of Freddie Mac fell almost 25%, or $1.46, to $4.39.

The Dow Jones Industrial Average fell 180.51, or 1.55%, to 11,479.39 points also rattled by a Wall Street Journal report that suggested that Lehman Brothers' quarterly earnings might be weaker than expected.

John Merrill, chief investment officer at Tanglewood Wealth Management, said investors were realising that the crisis in the financial sector was unlikely to abate any time soon.

"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," he said.

Severe stress

Shares in Freddie and Fannie fell sharply last month on fears that they would run out of money to fund their business, forcing the US government to take radical steps to ease the panic.

The two firms are the backbone of the US mortgage market as almost all US lenders rely on them to buy their mortgages in order to access the funds to lend to consumers.

As mortgage guarantors, they must pay out when homeowners default on their loans.

With the housing market across the US crumbling, their finances have come under severe stress.