For the third day this week the stocks of Freddie Mac and Fannie Mae took a hammerin' on Wall Street and for the second day major newspapers are speculating on their survival as independent companies.

On Friday The New York Times and Barons both reported that the two government sponsored enterprises (GSEs) are under mounting pressure to raise additional capital and The Times saying that the Bush administration is considering a plan to take over either or both of the companies and place them in a conservatorship if their problems continue.

On Thursday the value of Fannie Mae's stock fell another 14 percent and Freddie's were off an additional 22 percent. This brings total losses in value for just the past week to 45 percent and 30 percent respectively.

And things were not looking much brighter at the opening bell on Friday. Fannie Mae was down $6.20 to $6.92 and Freddie Mac had lost $3.18 and was selling at $4.03.

If either company were to be placed in a conservatorship, the value of its stock would be next to nothing and any losses on mortgages they own or guarantee would be paid by taxpayers. At present the two companies own or guarantee $5 trillion of debt (approximately one-half of the U.S. residential mortgage debt.). The two have already reported $11 billion in losses in the last few months.

The two GSEs are in a difficult position. If they resort to new issues of stock to raise capital they will dilute shareholders' equity accordingly which means they must sell even more stock to raise the same amount of money. At the same time, borrowing costs for the two have risen as debt markets re-evaluate their viability. This increase will make it more difficult for the two � the nations' major consumers of residential mortgages � to maintain a pipeline for purchasing loans from commercial lenders.

Even an explicit, legislative guarantee that the Federal Reserve or other agencies would stand behind the GSE debt would probably have little effect as financial markets have long assumed such government backing and have priced that into the market.

According to The Times, under a 1992 law either corporation could be put into conservatorship if their top regulator � at present the director of the Office of Federal Housing Enterprise Oversight � found that either one was "critically undercapitalized." Conservatorship would give the conservator sweeping powers to overhaul the system but it would not have authority to shut them down.

Part of the pressure on the GSEs arise out of changes in accounting rules which, if enforced, would force them to raise $75 billion in new capital. The rule would force them to put off-balance sheet liabilities onto their balance sheet. Inclusion of such liabilities as the guarantees on their mortgage-backed securities would have to be matched by the need to raise those vast sums of capital. Under such a rule Freddie Mac is already technically insolvent.

All concerned are describing meetings and discussions about conservatorship as nothing more than contingency planning. However, one thing is clear; Freddie Mac and Fannie Mae are so integral to the housing and financial markets they cannot be allowed to fail.