FNM and FRE dead!

FNM down 22% to $5.50 and FRE down 21% to $4.04 in after-hours trading. So far, $108 billion in market cap has been wiped out. And apparently the last $8.5B will be wiped out this weekend by a government takeover of the two entities.

The Treasury Department is expected to announce as early as this weekend a plan to bail out and recapitalize collapsing home mortgage giants Fannie Mae and Freddie Mac in one of the biggest government rescues in U.S. history. Such a plan would end a long downward spiral for the firms, which the government created to help expand home ownership and provide a secondary market for home loans. Rep. Barney Frank (D.-Mass.) confirmed in a statement Saturday that Treasury Secretary Henry Paulson is set to put the federal government in control of the two troubled mortgage owners. But Frank, who is chairman of the House Financial Services Committee, said he had no details on the intervention plan. Officials at the Treasury Dept. could not be reached for comment.

The historic takeover of Fannie Mae and Freddie Mac, which could come as soon as Sunday, moved to the forefront of the presidential campaign Saturday as candidates and congressional leaders seized on the enormous implications for taxpayers and the economy. Fannie Mae and Freddie Mac together hold or back half of the nation's mortgage debt, and have played an increasingly important role in the real estate market since the credit crisis started in August 2007. A government bailout could cost taxpayers around $25 billion, according to the Congressional Budget Office. Treasury Secretary Henry Paulson and two other regulators are working on a plan to put the troubled mortgage finance companies into a conservatorship, and remove Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee. The government is expected to control the two companies at least a year as it evaluates and debates whether Fannie and Freddie should remain government-run entities or be restructured in some fashion, Frank said in an interview. At a rally in Colorado Springs, Col., Republican vice presidential nominee Sarah Palin said, "They've gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help." Democratic nominee Barack Obama, speaking in Terre Haute, Ind., said, "These entities are so big and they're so tied into the housing market that it is probably true that we have to take steps to make sure they don't just collapse, because the housing market, which is already weakened, would be in even worse shape if we didn't take some steps."

Here's a fairly insightful piece into the collosal failure of common sense at the two entities as the housing market worked itself into a frenzy from 2001 to 2006.

Mortgage giants Fannie Mae and Freddie Mac — despite their robust cadre of economists and mortgage experts — failed to heed warnings that the most dramatic housing bubble in U.S. history would burst. The companies — particularly Freddie Mac — didn't raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices. Federal regulators after scouring the companies' books with aid from investment bank Morgan Stanley — believe the companies pushed accounting conventions when calculating their financial cushion against losses, a person briefed on the matter said Saturday. The person declined to be named because details of the government's actions were not yet public. As their losses started rising at alarming rates over the past year, investors gradually lost confidence, forcing the government's historic takeover of the two companies, which could be announced as soon as Sunday and was expected to include the ouster of top executives.

Ironically, the big story on Friday was how FNM and FRE had both gone up 9.7% and 3% in what was otherwise a flat market.