No Bailout For Fannie And Freddie Leaves Financial ETFs Trying To Stay Afloat

Shares for the ailing Fannie Mae (FNM) and Freddie Mac (FRE) fell even lower earlier this morning after an immediate bailout was ruled out - throwing the housing market into question and related exchange traded funds (ETFs) lower.

Treasury Secretary Henry M. Paulson said that the government’s focus right now is supporting the companies in their current form, reports Michael M. Grynbaum for the New York Times. Naturally, the markets didn’t like that idea. The companies currently operate with an implied, but not assured, government guarantee.

While the shares are declining, investors seem to feel that the government will step in and guarantee any outstanding obligations. Officials are already considering having a plan to take over one or both of the companies and place them in a conservatorship. If that happens, their shares will be worth next to nothing, and any losses on mortgages would be paid by taxpayers.

The two companies are the largest buyers of home loans in the country, and as such, the provide liquidity to housing markets, says Bill Seidman for NPR. If they were to go under, it could make the current credit crisis look like a hiccup.

As might be expected, financial ETFs are trading lower this morning:

• PowerShares Financial Preferred Portfolio (PGF), down 6.1% year-to-date
• iShares Dow Jones U.S. Financial Services Index Fund (IYG), down 34.8% year-to-date
• Financial Select Sector SPDR (XLF), down 32.3% year-to-date
• KBW Bank (KBE), down 35.1% year-to-date

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