This question has reverberated through financial markets worldwide since last Friday, when the shares of the two companies fell yet again in a day of wild swings that left investors fearful of what might happen next.

But the question is difficult to answer with any certainty because of the size and complexity of Fannie Mae and Freddie Mac, companies that lie at the heart of the housing market in the United States and touch nearly one out of every two home mortgages.

Wall Street analysts disagree about how high the companies' losses will mount as home prices decline further and foreclosures grow - an outcome that depends on the course of the housing market and the broader economy.

US Treasury Secretary Henry Paulson last Friday voiced confidence that the companies were healthy. Citigroup broke with the prevailing public view among major investment banks and issued a report recommending that people buy the two stocks.

Freddie Mac and Fannie Mae buy mortgages from banks and other lenders.

Sometimes, they keep those mortgages as investment. As at May, they held mortgages worth about US$1.5 trillion (S$2 trillion) combined. Other times, they repackage the mortgages for sale to investors, along with a guarantee that they will pay off the loan if the home owner defaults.

Fannie Mae and Freddie Mac have guaranteed mortgages worth about US$3.9 trillion.

Those who see trouble ahead say that Freddie Mac and Fannie Mae have vastly underestimated how many bad loans they have bought and, as borrowers default, the companies will start haemorrhaging money.

'Odds are that things are going to get worse and, so far, no one has done a good job of estimating how bad they will get,' said Mr William Poole, the former president of the Federal Reserve Bank of St Louis. 'By some methods of accounting, these companies have already reached zero value, or are almost there.'

The companies themselves acknowledge that they bought many bad loans. In the past nine months, they have reported losses of more than US$8 billion, and estimated that losses would grow by as much as US$24 billion over the next few years.

Sceptics say even those dour forecasts are too optimistic, and predict that Fannie Mae and Freddie Mac could lose US$50 billion to US$100 billion over the next two years.

However, Fannie Mae and Freddie Mac and their supporters say such pessimism is unwarranted, noting that the companies have more than US$90 billion on hand in reserves, and that billions of dollars in revenue come into each company every year.

Whatever their losses, the companies will almost certainly need to raise additional money before the end of the year. That will be difficult, however, given the uncertainty hanging over them.

By law, Freddie Mac and Fannie Mae must hold a certain amount of so-called core capital in reserve. Otherwise, the government will effectively take control of the companies.

The companies can raise money by selling new stock. But after the mauling their stock has taken, they would have to issue millions of new shares to raise just US$1 billion. This would depress the price of all the shares in the marketplace, creating a downward spiral that would make it harder and harder to raise money.

Some onlookers are betting the government will step in and give the firms a cash infusion of taxpayer dollars. But in this market, nothing is certain.

NEW YORK TIMES