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While scare stories abound about an imminent government takeover of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), I doubt we'll ever really see that. I suspect what's fueling these stories is an attempt by the Bush Administration to tell Fannie and Freddie that they must raise additional capital quickly or more drastic action will be taken.

Truthfully, the government can't afford to take over Fannie and Freddie because their outstanding debt would more than double the federal government debt outstanding, which would further deteriorate the dollar on international markets. Fannie and Freddie own or guarantee about $5.2 trillion dollars of U.S. home mortgages, or nearly half of those outstanding.

Stock investors are running from the company, but bond investors are not. According to the Wall Street Journal this morning, Bill Gross, chief investment office of PIMCO, bought a large amount of Fannie Mae debt on Thursday. He told the Journal, a default would set off "a firestorm of intolerable proportions." Legg Mason Capital is making big bets on the health of Freddie. At the end of the first quarter it became Freddie's second-largest shareholder, adding 35.6 million shares for at total of 50.2 million. Other major holders include AXA, Capital World Investors, and Pzena Investment Management.

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Don't hold your breath waiting for the government to take over Fannie and Freddie originally appeared on BloggingStocks on Fri, 11 Jul 2008 09:35:00 EST. Please see our terms for use of feeds.

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