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US takes over Fannie, Freddie in bid to ease finance crisis
2008-09-07
WASHINGTON (AFP) - The US government took over mortgage giants Fannie Mae and Freddie Mac on Sunday, placing them in a "conservatorship" to help avert a financial system meltdown from the housing crisis. Treasury Secretary Henry Paulson announced the US regulator was seizing control of the government-chartered, shareholder-owned firms underpinning trillions of dollars of home loans. The move constitutes a massive government intervention to contain the damage from the worst housing slump in decades, which has rippled through the banking system and led to multibillion-dollar losses for Fannie and Freddie. The plan "is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition" of the two government-sponsored enterprises, or GSEs, Paulson said. "Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking," Paulson said in a statement. New chief executives have been installed as part of the action that Paulson said was needed in view of "the inherent conflict and flawed business model" embedded in the structures of the two companies. Departing CEOs Dan Mudd of Fannie Mae and Dick Syron of Freddie Mac "have agreed to stay on for a period to help with the transition," Paulson said. Herb Allison, chairman of the retirement fund TIAA-CREF and a former Merrill Lynch executive, will be the new CEO of Fannie Mae and David Moffett, vice chairman at US Bancorp, will head Freddie Mac. "Monday morning the businesses will open as normal, only with stronger backing for the holders of (mortgage-backed securities), senior debt and subordinated debt," said Federal Housing Finance Agency director James Lockhart. Federal Reserve chairman Ben Bernanke, part of frantic several days of talks to come up with the rescue plan, lauded the effort. "These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," Bernanke said in a statement. One key element in the plan enables the Treasury and FHFA to purchase a new class of preferred stock in the firms that "will ensure that each company maintains a positive net worth," Paulson said. The Treasury will initially purchase one billion dollars in shares in each of the firms, but will have the authority to boost that total to 100 billion dollars each. The new plan does not eliminate the existing common and preferred shares but means they would absorb any losses ahead of the government, Paulson said. Another step -- authorized by emergency legislation passed by Congress in July -- opens up a new, unspecified, Treasury line of credit to the two firms through the Federal Reserve. "This facility is intended to serve as an ultimate liquidity backstop," and will be available through December 2009, Paulson said. Paulson also said Treasury "is initiating a temporary program" to purchase mortgage-backed securities of Fannie and Freddie, to help provide liquidity in a financial market strained by a credit crunch. "Treasury will begin this new program later this month ... Additional purchases will be made as deemed appropriate," Paulson said, adding that "that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains." The scale of the program "will be based on developments in the capital markets and housing markets," according to a Treasury fact sheet. Under the plan, Fannie and Freddie will "modestly" increase their portfolios of debt through the end of 2009. Then, these will be reduced at the rate of 10 percent a year in an effort to limit "system risk" to the financial system, according to Paulson. The portfolios will eventually stabilize "at a lower, less risky size," he said. David Kotok, chief investment officer at Cumberland Advisors, said the new initiative "draws the line on moral hazard so the existing preferred and common shares do not get bailed out by the government." The existing shares "most likely are worth a few pennies" but the fate will not be known for some years until the crisis is over, Kotok said. Kotok said the plan will likely "jump start" the ability of Fannie and Freddie to pump money into the housing market and that "this will will bring down mortgage rates."
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 Fannie, Freddie execs turned aside warnings (2008-12-09) | | Former Fannie Mae, Freddie Mac execs to testify (2008-12-09) | | Freddie seeks gov't aid after $25.3B loss (2008-11-14) | | Fannie Mae posts $29B loss, may tap gov't funding (2008-11-10) | | Fannie, Freddie disclose subpoenas, investigations (2008-09-29) | | With finance crisis, hands-off era over (2008-09-17) | | Lehman: The next bailout? (2008-09-13) | | Fannie, Freddie rescue binds taxpayers to housing market (2008-09-09) | | Congress weighs the fate of Fannie, Freddie (2008-09-09) | | Mortgage rates drop after Fannie, Freddie takeover (2008-09-08) | | Fannie and Freddie: why the takeover (2008-09-08) | | Fannie, Freddie deal helps some borrowers, not all (2008-09-08) | | World stocks surge on US mortgage rescue plan (2008-09-08) | | Wall Street soars on Fannie, Freddie bailout (2008-09-08) | | China and Japan hail U.S. mortgage rescue as doubts linger (2008-09-08) | | US government takes on big role in mortgage market (2008-09-08) | | World stocks soar after Freddie, Fannie bailouts (2008-09-08) | | US Government seizes control of mortgage giants (2008-09-07) | | Battered stocks face another tough week (2008-09-07) |  US takes over Fannie, Freddie in bid to ease finance crisis (2008-09-07) | | Obama: Recession could delay rescinding tax cuts (2008-09-07) | | Candidates weigh in on stabilizing Fannie, Freddie (2008-09-06) | | Government may soon back troubled mortgage giants (2008-09-06) | | McCain backs government takeover of mortgage giants (2008-09-06) | | Fannie, Freddie blind to the bubble (2008-09-06) |
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