August 21, 2008 / 7:15 PM / 11 years ago

TIMELINE: Fannie and Freddie problems deepen

WASHINGTON (Reuters) - A Treasury Department bid to build investor confidence in Fannie Mae and Freddie Mac by offering an unlimited line of credit and a capital infusion, if necessary, appeared to be unraveling by mid-August.

As share prices for the mortgage finance giants tumbled and their losses soared, financial market participants speculated the government would be forced to step in with some type of bailout for the distressed companies.

The only question for many investors was how a bailout will be structured and when it might come.

Below is a recap of events since July:

July 7-10 - A Lehman Brothers research report speculating that Fannie Mae and Freddie Mac may need as much as $75 billion in new capital spooks investors, who begin dumping shares.

Assurances by the Office of Federal Housing Enterprise Oversight that it is misleading to say the companies are undercapitalized and need a dramatic capital infusion only briefly stems the share price decline.

July 11 — The New York Times reports that Treasury Secretary Henry Paulson is committed to not bailing out shareholders in any government rescue of the companies.

Reuters reports that the Federal Reserve has offered an assurance of access to Fed money if needed.

July 13 — After a whirlwind weekend of negotiations, the Treasury and the Federal Reserve announce emergency measures. Fannie Mae and Freddie Mac will get access to credit lines, including direct access to Fed money if necessary, and a provision for the Treasury to take an equity stake in the companies if required. The Securities and Exchange Commission announces measures aimed at stemming the spread of false rumors.

July 15 — Paulson joins Fed Chairman Ben Bernanke and SEC Chairman Christopher Cox in defending their bailout plan to lawmakers. Cox says the SEC will impose an emergency measure designed to make it more cumbersome to sell short the shares of Fannie Mae, Freddie Mac and 17 other major financial institutions.

Fannie Mae and Freddie Mac shareholders still find no overt assurance regarding the fate of common stock in any government bailout. Freddie Mac shares plunge 26 percent and Fannie Mae plummets 27 percent.

July 16-17 — Equity investors finally sense some relief as the U.S. government gains some key support for the rescue package. Short sellers begin to back off the stocks ahead of the SEC’s emergency short-selling rules taking effect.

Freddie Mac completes its second successful debt sale of the week, and confidence rises about the fate of the rescue effort moving through Congress. Fannie Mae shares rise more than 18 percent and Freddie Mac adds nearly 22 percent.

July 21 — Freddie Mac has another successful debt sale, though there is evidence of smaller demand than the previous week’s sale. The SEC’s short-selling restrictions take effect.

Fannie Mae gains more than 5 percent. Freddie Mac falls more than 4 percent.

July 22 — Congressional negotiators reach agreement on language for a housing rescue package that includes the Fannie-Freddie support measures.

July 23 — The House of Representatives approves the rescue bill, sending it on to the Senate. The White House drops opposition to other measures in the broad housing bill and pledges to sign it into law.

Fannie Mae shares rise almost 12 percent to $15, their highest close since July 9. Freddie closes up more than 11 percent at $10.80, its highest close since July 8.

July 25 — U.S. Senate approves the rescue bill by a 72-13 vote; it is sent on to the White House to be signed into law.

Aug 6 — Freddie Mac posts a loss of $821 million, or $1.63 a share, for the second quarter, its fourth straight quarterly loss. Freddie doubles its provisions for losses and sharply cuts its dividend.

Aug 8 — Fannie Mae posts a second-quarter loss of $2.3 billion before preferred dividend payments, or $2.54 a share. It is the fourth straight quarterly loss, bringing its cumulative loss over the 12 months to $9.44 billion before preferred dividends.

Fannie cuts its dividend and says it will raise loss reserves.

Aug 12 — SEC restrictions on short selling of 19 financial stocks, including Fannie Mae and Freddie Mac, end.

Aug 17 — Barron’s magazine reports the Treasury Department is increasingly likely to recapitalize Fannie Mae and Freddie Mac in coming months, using taxpayer’s money.

Aug 18 — Share prices for the mortgage finance companies drop, with Fannie Mae’s price plunging 22 percent to a 16-year low of $6.15 and Freddie Mac’s down 25 percent to $4.39.

U.S. Treasury says it has no plans to use its new authority to backstop Fannie and Freddie by providing equity capital or new loans.

Aug 20 — The U.S. Treasury confirms that officials from the department and Freddie Mac met to talk about the company’s health and about how it can best weather current economic woes.

Editing by Leslie Adler

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