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Kai Ryssdal: Investors seemed to believe that if Treasury Secretary Henry Paulson does step in -- with billions in taxpayer dollars -- individual shareholders will be wiped out. But why do investors believe that? Here's Marketplace's Steve Henn in Washington.
Steve Henn: Wall Street's betting that if Uncle Sam steps in to help Fannie and Freddie, taxpayers will come first, shareholders will get the shaft.
Doug Elmendorf: Fannie and Freddie are so important to the mortgage market and thus to the housing market that we can't afford to let them fail.
That's economist Doug Elmendorf at Brookings. He's worked all over the federal government.
Elmendorf: But it is very important that we think about the way in which the government can become involved. So that the taxpayers don't bear the risk of loss, while the private shareholders gain the benefits.
Elmendorf says the government can offer the mortgage giants a loan, buy a stake in the companies or do both.
Elmendorf: The problem with a loan is that the upside potential if the companies do well is captured by the shareholders. While the downside risk that the companies are unable to repay the loan falls on the taxpayers.
That's a political nightmare. The other alternative is the feds take an equity stake in the companies. The feds would buy newly issued shares in Fannie and Freddie, diluting the value of old shares to next to nothing. That's exactly what Wall Street fears, even though taxpayers could profit if the businesses succeed.
Elmendorf: Well, I don't want to speculate on what Secretary Paulson might do.
Fannie Mae's CEO appeared on public radio's Diane Rehm Show this morning to reassure investors a bailout wasn't on the horizon.
Daniel Mudd [on the radio Diane Rehm Show]: They haven't offered anything and we haven't asked for anything. I don't anticipate that we will do that.
Shareholders weren't reassured. After that interview, Fannie's stock continued to plunge.
In Washington, I'm Steve Henn for Marketplace.