Stock prices of Fannie Mae and Freddie Mac fall sharply.

Today the value of Fannie Mae and Freddie Mac have fallen about 16-18% in part because of new accounting rules that might force them to bring questionable off-balance sheet assets onto their books. This would leave them so undercapitalized that they would need to raise massive amounts of cash to avoid a huge government bailout.

Bloomberg reports (nonunique link):

Freddie Mac and Fannie Mae plunged in New York trading and their credit-default swaps rose as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.

Freddie Mac fell as much as 29 percent and Fannie Mae dropped as much as 26 percent, reaching their lowest price in 13 years, after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion in capital. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.

"There's probably an accumulation of events today that has focused investor selling," said Christopher Sullivan, who oversees $1.3 billion as chief investment officer at United Nations Federal Credit Union in New York.

Today's declines extend Fannie Mae's drop this year to 62 percent and Freddie Mac's to 66 percent. Washington-based Fannie Mae so far has raised $6 billion in capital to offset writedowns on mortgages it owns or guarantees. Freddie Mac, based in McLean, Virginia, raised $13.5 billion since December and said last week plans to add $5.5 billion probably won't be fulfilled until late next month. . . .

FAS 140

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.

The companies will probably get an exemption from the rule because it would be "very difficult" for them to raise that amount of capital, the analysts said.

Note that, even if Fannie and Freddie obtain an exemption from new accounting standards, that doesn't make them adequately capitalized. That just allows them to continue to pretend that they are.

In other news concerning the financial health of Fannie Mae and Freddie Mac, consider this change proposed by Barack Obama. In the Boston Globe's story about Barack Obama's strong support for funneling government money to real estate developers (who often abandon the properties they build with government money) is this paragraph urging the "siphoning" of profits from Fannie Mae and Freddie Mac:

Obama has continued to support increased subsidies as a presidential candidate, calling for the creation of an Affordable Housing Trust Fund, which could distribute an estimated $500 million a year to developers. The money would be siphoned from the profits of two mortgage companies created and supervised by the federal government, Fannie Mae and Freddie Mac.

BO was in that game in Chicago, and as you mentioned in your post, many of the properties are never developed or go into foreclosure. My understanding is that Tony Rezko, BO's go to guy for real estate in Chicago, was in that game as well and Rezko ended up abandoning a number of unfinished buildings that were helped along with money from programs that BO sponsored in the Illinois Senate. I don't think the national media have picked up on this aspect of BO's past and the unsuccessful nature of the whole project.
7.7.2008 4:51pm
James Lindgren (mail):

Read the Boston Globe story. It is the most detailed so far.
7.7.2008 5:04pm
I think we should just use the money we save from winning the war in Iraq to prop up Fannie and Freddie...
7.7.2008 5:34pm
Thales (mail) (www):
"I think we should just use the money we save from winning the war in Iraq to prop up Fannie and Freddie..."

Great idea, which I presume you will forward to the McCain campaign's thoughtful economic advisors. Let's also pledge to use any victory savings from the coming war in Iran for the same purpose. While we're at it, let's start a bunch of other wars and pledge the savings from those to paying down the national debt . . . we'll be back in the black by 2013 for sure!
7.7.2008 5:53pm
Sarcastro (www):
Thales, Thales...McCain is much swifter than you. He's already said he plans on implementing gab's suggestion before gab even made them!

Seeing into the future is one of McCain's best traits if you ask me.
7.7.2008 6:17pm
A. Zarkov (mail):
Wow. I told a friend to get out of Fannie and Freddie last Fall-- he a huge amount invested in them. It was obvious back in March 2007 when Bear Stearns bailed out its hedge funds that the whole MBS business was going down the toilet. None of this should be a surprise. Anyone who is a regular reader of the Calculated Risk blog knew more than 3 years ago that the real estate and mortgage industry was headed for a collapse. I wish we had Tanta (who writes about half the blogs) regulating the mortgage business. Of course either BHO of McCain will appoint some idiot.
7.7.2008 6:31pm
A. Zarkov (mail):
"Seeing into the future is one of McCain's best traits if you ask me."

McCain is beyond hopeless. His speeches are like some Saturday Night Live skit only not as realistic. I wonder if his doctors have him on statins. Statins deplete co-enzyme Q10, which some people think lead to memory loss and dementia.
7.7.2008 6:41pm
Dr. T (mail) (www):
This just shows that Obama is a man of the people. His knowledge of economics equals that of the average American adult: none.
7.7.2008 7:12pm
Jess Helms (mail):
Clearly, the same commie sympathizers who gave us racial intergration, world government and homosexual domination of education and art, have conspired to ruin yet another American institution.

Fortunately, there is a solution at hand: If we cut all funding for bogus AIDS programs and re-route that money to save (mostly) heterosexual homeowners, we'll get two bonus bangs for our buck.

I should have run for President! Damn Ronnie never got much done anyhow.
7.7.2008 8:16pm
As I am sure most readers are aware, Freddie Mac and Fannie Mae are "too big to fail." Which means that taxpayers will be on the hook for a multi-trillion dollar bailout if the did not manage their credit risk correctly.
7.7.2008 8:54pm
"This would leave them so undercapitalized that they would need to raise massive amounts of cash to avoid a huge government bailout."

Actually, they would need to raise huge amounts of cash in order to avoid significantly restricting their operations. And possibly in order to remain solvent. Contrary to the apparent prevailing wisdom, insolvency does not in itself necessitate a huge government bailout, even for Freddie and Fannie.

To the extent that FAS 140 requires companies to bring off-balance-sheet assets and liabilities on to the balance sheet, it's not really creating any real profits or losses, just requiring companies to acknowledge the ones they may already hold.

This is not a bad thing, but it will create huge problems with capital ratios and there's a sort of ex post facto trap if regulators don't come up with a sensible way to deal with it.
7.7.2008 8:59pm
Karl Stucky (mail):
Didn't I read somewhere a while back that ACORN is tied to folks who are tied to ghetto finacing/construction rackets? You know, float guaranteed bonds for fat commissions to build wasteful stuff for fat contracts. And ACORN is in the pocket of Jesse Jackson. And Jesse Jackson is an honorary member of the Illinois Dem Machine. And Obama was adopted and promoted by the same machine?
7.7.2008 10:44pm