Shares in Freddie Mac and Fannie Mae resumed their slide yesterday as investors reacted to an emergency announcement from the US Government on Sunday night that could significantly dilute their holdings.

Freddie and Fannie’s shares closed down 8.3 per cent and 5 per cent respectively in New York trading after the Government proposed plans to inject billions of dollars of taxpayers’ money into the companies, if necessary, by buying newly issued stock. Freddie Mac’s shares ended the day down by $0.64 at $7.11, while Fannie’s were off $0.52 at $9.73.

Investors initially welcomed the possibility of a cash infusion, sending up Freddie’s shares by 26 per cent and Fannie’s by 32 per cent, on the basis that the effective government guarantee averted the threat of bankruptcy. But the kneejerk reaction was not sustained. On reflection, mounting concerns that the credit crunch could become more severe and fears that the Government’s announcement could be the first part of a nationalisation of the groups, which would render their stock worthless, combined to further depress the mood on Wall Street.

Kurt Brunner, a portfolio manager at Swarthmore Group in Philadelphia, said: “There are still a lot of questions about Fannie and Freddie as to whether or not, despite all the rhetoric, they will still be shareholder-owned companies. “There are still ongoing concerns about whether the shares will be diluted.”

Brad Hintz, an analyst at Sanford Bernstein, said: “Any time the Government performs or hints at a bailout of any kind, it’s like putting up a large neon sign to the equity markets saying ‘we’re not at the bottom yet’. This kind of action is good for debtholders, though, because it confirms what we already suspected – that Freddie and Fannie bonds are equivalent to US Treasury debt.”

Concerns about Freddie and Fannie – more accurately the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, respectively – fed into more general fears about the outlook for the housing market and the collapse of IndyMac, the Californian bank on Friday night, pushing down American shares across the board. The Standard & Poor’s 500 index fell 11.2 points to 1,228.30, while the Dow Jones closed off 45.40 points at 11,055.20. The Nasdaq Composite declined by 26.21 to stand at 2,212.87.

Reports that Lehman Brothers was considering a range of options to put a floor under its plummeting share price, which included a possible strategic alliance, further fuelled investors’ anxieties. Meanwhile, a new report from RBC Capital Markets forecast that more than 300 banks could fail in the United States within three years.

Although America’s equity markets continued to suffer, the debt markets breathed a sigh of relief as Freddie Mac reported that a key $3 billion (£1.5 billion) offering of short-term debt had attracted higher than average demand.

The Government’s assurance on Sunday night that it stood behind Fannie and Freddie was motivated largely by the need to ensure that Freddie’s debt offering went off without a hitch yesterday. Weak demand for this normally routine offering would have panicked the debt markets – in which Fannie and Freddie are crucial components, owning or guaranteeing more than half of America’s $12,000 billion of outstanding mortgages – and potentially could have dragged down the entire US economy. The success of the Freddie offering helped to decrease the interest rate on ten-year US Treasuries by 0.1 of a percentage point, to 3.86 per cent, a signal that lenders had become less nervous.

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