The interim rescue plan for Fannie Mae and Freddie Mac unveiled by the US Treasury last month is coming under severe strain in the market, putting pressure on the government to consider further intervention to help the mortgage financiers.

Yesterday shares in both government-sponsored enterprises (GSEs) plunged following a report in Barron’s magazine that the Treasury would inject capital in the form of preference shares on terms that punished existing investors if the firms failed to raise new equity.

The Treasury dismissed the report as “speculation”. It told the FT it still had no intention of using its newly authorised power to invest in either the debt or equity of Fannie and Freddie. The question is whether it may be forced to do so.

The logic of the plan unveiled on July 13 was that the market would be reassured by the Treasury obtaining authority to invest in Fannie and Freddie, reducing the likelihood that the government would actually have to bail them out.

But Ira Jersey, interest rate strategist at Credit Suisse, said the Treasury plan did little to reassure investors in their equity or junior debt.

Financial Times, Daily Telegraph