The evidence is thin, but at least it is available. Freddie Mac (FRE) and Fannie Mae (FNM) could raise money on their own and without a government bail-out which would wipe out common stockholders and investors in some of the preferred in both companies.

Freddie Mac was able to sell $2 billion in short term notes yesterday, but the overall news was better than that.

Pacific Investment Management and Loomis Sayles, which control several of the largest bond funds in the US, each said they might put money into preferred shares of the two mortgage companies. Dan Fuss of Loomis told Reuters that the government would have to offer preferred shares that could be converted to common stock. "It is a long-term call on the common stock," Fuss said. "Without such a plan like this, shareholders might get zero. You want zero or ongoing companies?"

That is the argument in a nut shell. The government must say that it will not undermine the opportunity for the companies to stay private or it must face a skeptical market which has no interest in investing only to lose all of its money.

Treasury does have a way out now. It has the potential of keeping tax-payers from bearing the load of keeping Fannie Mae and Freddie Mac in business. To do so, it will have to undermine the free market system by guaranteeing that some securities in the firms will not be wiped out. If the firms falter, investors will at least be made whole.

While the program of guarantees is a form of economic socialism, it is one that allows the tax-payer to backstop an investment instead of making it directly. If Fannie Mae and Freddie Mac make it, the average citizen will have been relieved of the financial burden of keeping important financial firms alive.

The Fed and Treasury have already given up on free market solutions for troubled financial companies. It might as well take the next step.

Douglas A. McIntyre

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