Another bad day for the financial markets as two of its major players, Fannie Mae and Swiss banking power UBS announced big losses on mortgage related investments.

UBS said that it would have first-quarter losses of $10.9 billion and would cut 5,500 jobs, nearly half in its investment banking unit. The job cuts would be in addition to 1,500 already eliminated since the bank first encountered problems last fall. Most of the jobs to be eliminated will be in the United States and Great Britain.

The bank will write down $19 billion in subprime mortgage securities and other investments. This will bring total write-downs since the beginning of its losses to $38 billion.

UBS also said it would be selling $15 billion of distressed mortgages to Black Rock, an asset management company, and would close the bank's institutional municipal bond business in America. UBS valued the assets being sold at approximately $22 billion which would mean they were selling the mortgages at a $7 billion discount.

Fannie Mae announced that it would post a $2.19 billion loss or $2.57 a share in the first-quarter and another round of hefty write-downs. One year ago the giant government sponsored enterprise (GSE) reported net income of $961 million or $.85 per share. Despite the losses, revenue was up 38 percent to $3.78 million and its share of the market for new single-family mortgage related securities was over 50 percent.

The GSE also announced that it will cut its dividend to free up funds for future growth and would be raising another $6 billion in capital.

Analysts had expected a loss of $.81 per share, but results were hurt further by $4.4 billion from derivative losses and $3.2 billion in credit-related expenses. The continued slide in home prices also accelerated losses.

The value of the GSE's net assets lost $23.6 billion during the first quarter; however, Fannie Mae's accounting practices permit it to ignore the losses until they are actually realized.

Fannie's quarterly dividend will fall beginning in the third quarter to $.25 a share from $.35, saving the company about $390 million.

In spite of the losses, Fannie's regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) also announced on Tuesday that it was cutting the surplus capital requirement for Fannie by 5 percentage points to 15 percent and would cut it further to 10 percent in September as long as there was no adverse change to the company's regulatory compliance. The requirement was reduced from 30 percent in mid-March.

Along with its financial results, Fannie also said Tuesday that it will try to help cushion the mortgage market downturn by refinancing its borrowers who owe more on their mortgages than the value of their homes.

With Washington increasingly relying on Fannie and the other GSE Freddie Mac to pick up the slack in buying mortgages and mortgage-backed securities � the two between them bought 80 percent of all mortgages purchased by investors in the first quarter of 2008 - The New York Times in an article on Tuesday asked whether the two companies were up to the task.

The Times article says that some financial experts worry that the companies are dangerously close to the edge. The capital that OFHEO requires them to hold - $83 billion between them - underpins $5 trillion in debt and other financial commitments.

The article quoted analysts as saying that the companies are sitting on billions of dollars in additional losses that they have not yet fully acknowledged (we mentioned the $23.6 billion in unrealized losses held by Fannie, above). Both companies have also recently changed their policies on delinquent loans, which they previously recorded as impaired when borrowers were 120 days late. Now, some overdue loans can go two years before the companies record a loss.

"If either company (Freddie or Fannie) stumbled," the article says, "the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely.

"And if Fannie or Freddie fails, taxpayers would probably have to bail them out at a staggering cost."

Federal officials have long and adamantly denied that they would bail out Freddie or Fannie yet the perception that the two corporations, even though stockholder owned, are so closely aligned to the government that it would be impossible not to offer such a bailout. This perceived relationship has allowed them to obtain credit at lower rates than other players and has led to charges of unfair competition. Now the government may be unable to refuse such a bailout should worse come to worse.