July 11 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson signaled that a government takeover of Fannie Mae and Freddie Mac won't be necessary, saying they should continue as shareholder- owned companies with federal charters.

``Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,'' Paulson said in a statement in Washington. President George W. Bush told reporters separately that the two firms are ``very important institutions'' and that he discussed market ``concerns'' with Paulson earlier today.

Paulson's remarks indicate he wants to reassure shareholders they won't be wiped out by any government efforts to ensure the stability of the firms that own or guarantee almost half the $12 trillion in U.S. mortgages.

The companies' shares initially fell after the statement, before paring their losses. Fannie Mae declined $2.95, or 22 percent, to $10.25 in New York Stock Exchange trading, after reaching as low as $6.68 earlier today. Freddie Mac fell 25 cents, or 3.1 percent, at $7.75 after reaching a low of $3.89. Bonds and credit-default swaps on the companies rallied.

Paulson released the remarks after the companies' shares slid to their lowest levels in more than 17 years. Washington- based Fannie Mae and McLean, Virginia-based Freddie Mac fell more than 75 percent this year on concern they don't have enough capital to offset losses from the mortgage meltdown.

`Number of Options'

The Federal Reserve and Treasury are considering a ``number of options'' for aid to Fannie Mae and Freddie Mac, including lending through the central bank's discount window, Senator Christopher Dodd, a Connecticut Democrat and chairman of the Senate Banking Committee, said at a news conference.

Fed spokeswoman Michelle Smith said the central bank has held no discussions with Fannie Mae and Freddie Mac about access to the discount window. She declined to comment about which options are under consideration.

Late today, the companies defended their finances and said they have enough capital to weather the housing slump and help bolster the home loan market.

Fannie Mae ``has access to ample sources of liquidity, including access to the debt markets,'' spokesman Chuck Greener said in a statement. In a separate release, Freddie Mac said it's ``adequately capitalized, highly liquid and an essential part of the nation's housing system.''

Legislation Coming

Dodd said he expects the Senate and House of Representatives will next week ask Bush to sign into law a bill creating a stronger regulator for Fannie Mae and Freddie Mac and a federal program to insure as much as $300 billion in refinanced mortgages.

``This is not time to be panicking'' about Fannie Mae and Freddie Mac, said Dodd, whose panel oversees federal regulation of the firms.

The two companies will probably need a government lifeline, Senator John McCain of Arizona, the presumptive Republican presidential candidate, said to reporters on his campaign bus in Wisconsin. ``There's no doubt that there is a real significant, far-reaching problem that is going to have to very likely require some kind of government assistance.''

The federal government should soon channel capital to Fannie Mae and Freddie Mac, Robert Napoli, an analyst at Piper Jaffray Cos. in Chicago, said in an interview with Bloomberg Television. ``The more capital they add now, probably the less they'll have to add over the long run.''

Citibank Says Buy

Citigroup Inc. today kept a ``buy'' rating on the two stocks, saying the sell-off wasn't based on fundamentals. New York-based Citigroup analyst Bradley Ball said in a note to clients he doesn't expect ``nationalization'' of the companies.

The declines spurred officials to consider options including having regulators take over one or both companies, said Joshua Rosner, an analyst with Graham Fisher & Co. Inc., who met with officials in Washington yesterday.

``Although there is some danger here that Fannie and Freddie may become insolvent, I think it's very, very remote unless for some reason the credit markets lose confidence in the willingness of the U.S. government to stand behind them,'' said Peter Wallison, a former general counsel at the U.S. Treasury.

``It's impossible to imagine such a thing happening,'' Wallison, now a fellow at the American Enterprise Institute in Washington, said in an interview with Bloomberg Radio.

Credit Swaps

Credit-default swaps linked to the debt of Fannie Mae dropped 21 basis points to 56 basis points, according to broker Phoenix Partners Group in New York. Contracts on Freddie Mac declined about 19 basis points to 58 basis points. Before today, both contracts had more than doubled in the past two months.

``Nationalization should not be an option,'' former Treasury Secretary John Snow said in a telephone interview. ``They shouldn't be allowed to have their paper trade as if it's government paper.''

Officials said this week that the two government-sponsored enterprises have ``adequate'' capital, while Federal Reserve Chairman Ben S. Bernanke told lawmakers yesterday that they should, like all financial firms, raise more funds.

``They are adequately capitalized, holding capital well in excess of'' the requirements, James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, said in a statement yesterday. ``They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.''

$77 Billion

Fannie Mae and Freddie Mac would have to post pretax losses and writedowns of about $77 billion before the U.S. would be compelled to start a rescue, according to estimates by Fox-Pitt Kelton and Friedman, Billings, Ramsey & Co. analysts. The companies have already raised $20 billion to cover losses amid the highest delinquency rates in at least 29 years.

``Ofheo will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission,'' Paulson said today. ``We are maintaining a dialogue with regulators and with the companies.''

He and Bernanke yesterday said at a House Financial Services Committee hearing that Congress should pass legislation creating a new, stronger regulator for the two companies to help bolster investor confidence.

`Escalating' Signals

``The federal government will not only need to stand behind the GSEs but will need to encourage them to continue growing their book of business,'' Jan Hatzius, an economist at Goldman Sachs Group Inc. in New York, wrote in a note today. ``Should the market turmoil continue, the administration is therefore likely to continue escalating its signals of support'' to include ``outright credit support if needed,'' he wrote.

A federal rescue of Fannie Mae and Freddie Mac wouldn't compromise the Aaa credit rating for U.S. debt, according to Moody's Investors Service Inc.

``Even under a real stress scenario, the amount of money the government would have to come up with is not that large,'' said Steven Hess, vice president and senior credit officer at Moody's in New York. ``The amount of money required would not be so large that it would make us worry about the U.S. credit rating.''

``We must not overreact to the recent drops'' in the companies' shares, said Representative Paul Kanjorski, a Pennsylvania Democrat on the House Financial Services Committee. Ofheo ``has assured me that it is working to ensure the safety and soundness'' of Fannie Mae and Freddie Mac, which ``continue to have sufficient capital and liquidity.''

To contact the reporter on this story: Brendan Murray at brmurray@bloomberg.net

Last Updated: July 11, 2008 17:51 EDT