6 Things You Need to Know About Fannie and Freddie

A Freddie Mac sign sits in front of its headquarters in McLean, Virginia. Shares in Fannie Mae and Freddie Mac have dropped to their lowest levels in 17 years.

Yardeni says that it will take some form of government action to restore investor confidence in Fannie and Freddie. The odds of such intervention is "100 percent," he says. "The market isn't making up its mind—it's made up its mind," Yardeni says. But banking consultant Bert Ely isn't convinced that government action is imminent. "None of the policy options are attractive," Ely says. "There are not that many and they are not that attractive."

What are the government's options?
Jaret Seiberg, a research analyst for the Stanford Group, says that the most likely approach to a government bailout of Fannie or Freddie would involve the Fed buying GSE-issued debt. In addition to providing the company with immediate liquidity, the move would give Congress time to write legislation authorizing the government to make a capital injection in exchange for equity or warrants. The government would then sell the equity stake when the company returns to health. "As we saw with Bear Stearns, a financial firm can get into fatal trouble very quickly. That means there would not be time for Congress to pass a traditional rescue package," Seiberg said in a report. "So a troubled enterprise would need short-term liquidity help to hold it over until Congress can infuse it with long-term capital."

Other rescue options include a Bear Stearns-like approach, in which a private equity firm agrees to buy the company with government support, or an outright nationalization of Fannie or Freddie. Although nationalization cannot be ruled out, Seiberg sees several problems it. "In our view, it will be tough to get Congress to impose a full faith and credit guarantee on GSE debt. Too many conservatives would object," Seiberg says. "In addition, we believe Treasury would likely object for fear that it would raise the government's borrowing costs.