As reported in the NY Times:

Financial conditions are continuing to worsen at Fannie Mae and Freddie Mac, leading some investors to prepare for a government bailout of the housing giants even as the Treasury Department and the companies say such government intervention will not be necessary.

“The markets are acting like a bailout is inevitable,” said Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. Mr. Egan said he believed the federal government would need to help pump about $20 billion into each company, possibly through a government guarantee rather than through a direct injection of capital.

Treasury officials have repeatedly emphasized that they do not plan to use the authority, recently granted by Congress, to pump billions of dollars into the firms. Company insiders have begun arguing that the recent stock declines are the work of duplicitous critics conspiring to undermine the firms. Executives at both firms say they are confident they can raise additional money from investors and that the companies are adequately capitalized, with capital in excess of what they are required to hold by their regulator. Government officials note that both companies continue to buy mortgages and that they are borrowing at rates far below what other banks and companies pay.

But as the companies’ fortunes decline, their options are narrowing. Fannie and Freddie are a critical part of the nation’s housing finance system, owning or guaranteeing nearly half of all home mortgages. They have lost more than $14 billion in the last year, however, and are expected to announce further losses later this year. Government officials, company insiders and investors all agree the firms will need to raise more money.

Hence, the smell of a government bailout is getting stronger with each market closing.