U.S. stocks slumped today amid renewed investor concern that U.S. taxpayers may have to bail out agency mortgage lenders Fannie Mae and Freddie Mac.
The Dow Jones industrial average closed down 180.51, or 1.55%, at 11,479,39; the S&P 500 fell 19.56, or 1.51%, ending at 1,278.64; and the Nasdaq composite closed down 35.54 or 1.45%, at 2,416.98. All numbers are preliminary.
Fannie Mae and Freddie Mac, which together insure $5 trillion worth of mortgages, have posted multibillion-dollar losses over the past year due to the subprime debacle. If the agencies became undercapitalized, the government may need to take them over, which would wipe out the value of their stocks and bonds.
Fannie Mae lost 22% in trading today, and Freddie Mac, 23%, while Lehman Brothers Holdings Inc. fell more than 6% on talk the investment bank may report another huge loss in the third quarter and is trying to sell $40 billion in investments tied to commercial real estate. The Select Financial Sector ETF fell 3.35% today, reflecting investors bearish view on banks and brokerage firms.
Concerns over the capital positions of Fannie Mae and Freddie Mac, two government-sponsored enterprises that aid liquidity in the mortgage market, led in late July to a broad housing package in Congress, wrote analyst Edward Keane of research and rating firm A.M. Best Co. in a report. "The law provides the Treasury secretary with temporary authority to buy an unlimited amount of GSE obligations and securities through 2009."