Worries over U.S. mortgage firms grow

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Shares of Fannie Mae and Freddie Mac tumbled on worries they might run short of capital, placing the fragile U.S. economy at even greater risk. Treasury Secretary Henry Paulson said the primary focus was supporting them "in their current form as they carry out their important mission."

The reference to keeping Fannie and Freddie in their current form was a signal that the government wanted to see the firms survive as congressionally chartered but privately held companies and was not on the verge of nationalizing them.

That came as a disappointment to many on Wall Street.

"While Paulson is making supportive comments to the GSEs, there was no suggestion of any imminent bailout - nor enough specifics to the support they would give," said Bret Barker, portfolio manager with Metropolitan West Asset Management in Los Angeles. "The markets were looking for more from Paulson."

President George W. Bush said Paulson and Federal Reserve Chairman Ben Bernanke will be "working this issue very hard" but gave no details after meeting his top economic advisers.

Concern about Fannie and Freddie grew significantly after The New York Times said the administration was considering a plan to put the companies, thought to have implicit government backing, into a conservatorship if their problems worsened, citing people briefed about the plan.

A conservatorship is where regulators appoint a person or entity to run a troubled financial institution until it can be stabilized.

At midday, Fannie shares traded at $9.15, down 31 percent, while Freddie traded at $5.85, down 27 percent. Both have lost close to 90 percent of their value since August. The companies' bonds posted gains.

Bondholders theoretically would have priority in any insolvency.

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