Investors Convinced Washington Will Have to Rescue Fannie, Freddie

NEW YORK - Six weeks after Congress handed the Treasury a blank check to shore up Fannie Mae and Freddie Mac, investors have concluded the check will be cashed — it's now a matter of when, and on whose back.

Shares of the two mortgage giants have lost more than 80 percent of their value this year on fears that any government rescue would wipe out common shareholders. Their debt, held by central banks around the world, still trades on the assumption of government backing.

The two companies own or guarantee nearly half of America's $12 trillion in mortgages, and their collapse is considered unthinkable in Washington. Treasury Secretary Henry Paulson won authority in July to inject unlimited capital — a power he said he hoped never to use.

Freddie Mac reported an $821 million second-quarter loss and said it would slash its dividend. Fannie Mae lost $2.3 billion. Both face rising foreclosures as home prices fall in nearly every metropolitan area.

Foreign central banks, among the largest holders of the companies' bonds, have quietly signaled to Washington that their continued purchases depend on an explicit guarantee.

Analysts at several Wall Street banks now predict the Treasury will place one or both companies into conservatorship — a government takeover — before the end of the year, a step that would rank among the largest interventions in U.S. financial history.

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