Why Fannie, Freddie Are Spooking Markets

New lows in Fannie Mae and Freddie Mac are what's spooking the markets today.

Here's the problem: many believe equity holders in these stocks are in a no-win situation. Consider:

1) Over the weekend, Barrons said it was increasingly likely the U.S. Treasury might take over Fannie and Freddie; both stocks open weak.

2) Late in the morning, a spokesperson for the Treasury says it has no plans to use its authority to backstop Fannie or Freddie. Both stocks drop more, this time also bringing down the broader market -- but particularly other financials, as well as techs.
(Contd.)

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Read about these banks in danger:

- Merrill Lynch

- Wachovia Bank

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See what I mean? If the Treasury takes them over, it's likely one of the terms will be equity holders get wiped out; if the Treasury refuses to take them over and the situation continues to deteriorate, the equity will still go to zero.

In other words, bailout or not, equity can go to zero here.

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