Stocks ended Friday’s session in the red after continued turmoil in the credit markets again pulled down the broader indexes. Amid other negative news, new questions were asked about the overall health of Fannie Mae and Freddie Mac, the government-sponsored mortgage institutions whose shares have been ravaged over the past week.
The Dow Jones Industrial Average tumbled below the 11000 level for the first time in two years during the session but finished at 11100.54, off 128.48 points. Other major indexes followed a similar path, rebounding in afternoon trading and then sliding again to the closing bell. The Dow remains in bear-market territory, down 22%from its record close of 14164.53 hit on October 9, 2007.
The widespread use of Fannie and Freddie paper in the repurchase market (repos), an overnight facility that serves as a key funding source for banks and other institutions to finance their various business activities. A government infusion (ie. bailout) of capital to the GSEs could effectively erase some or all of their debt, which would leave the repo markets less liquid, with agency-debt borrowers scrambling to liquidate other assets to repay their loans.
Some observers believe the situation with Fannie Mae and Freddie Mac is far more serious than the “Bear Stearns” debacle because of the potential negative effects on the repurchase markets.
The turmoil around Fannie and Freddie has upset the shares of other companies that have large mortgage-related businesses. Lehman Brothers Holdings shares fell 16.6%; Lehman has a large mortgage book. Wachovia also has exposure to residential mortgage-backed securities and risky subprime loans as a result of its Golden West Financial acquisition. Its shares declined 12.1%.
This is just the latest repercussion from the street’s bad bets on mortgage backed securities (MBOs). Investors in bond and income funds marketed and sold by firms such as Evergreen, Fidelity, State Street, Charles Schwab or Morgan Keegan already understand the devastating effect the continuing fallout in the credit markets has on their individual investments. For more information call (866) 352-3476.