Financial Markets Saw it Coming 

Financial markets have come to expect that an investment by the US Treasury would explicitly back the companies' $1.6 trillion in debt, but leave their shares nearly valueless.

In this July 2, 2008 file photo, a foreclosed home is seen for sale in Sacramento, Calif.  [Agencies]

The Washington Post reported on Saturday that the value of the company's common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares, would be protected by the government.

Separately, the New York Times said the executives and their boards would be replaced and shareholder value diluted, but the companies would be able to continue functioning with the government generally standing behind their debt.

Analysts at Citigroup, Merrill Lynch, and Goldman Sachs have issued reports since mid-August saying the companies had plenty of capital to operate for the near term, and both have successfully rolled over debt in the meantime.

However, since August22, all the major credit rating agencies have cut their ratings on the companies' preferred stock on expectations that the share price declines had cut access to capital, increasing the need for emergency financial support.

While the companies never lost their access to capital markets, the biggest buyers of their debt had grown more cautious. Foreign central banks reduced their holdings of "federal agency" debt in custody at the Federal Reserve in the past week for the seventh week in a row.

With foreign demand now in question, "it sounds like they said, 'Why wait until there's a total panic? Let's go ahead and forestall it somewhat.' But there's still so much uncertainty of how investors will be treated," said James McGlynn, portfolio manager at Summit Investment Partners in Southlake, Texas.