Feds outline Fannie, Freddie takeover

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By Patrice Hill

The Treasury Department announced Sunday that it is taking control of Fannie Mae and Freddie Mac and will infuse cash into the mortgage finance giants to make sure that Americans will still be able to find affordable mortgages and that the global markets will continue to operate smoothly.

The massive and unprecedented takeover is likely to become the largest financial bailout in U.S. history, analysts said. Government officials said the multi-billion-dollar action, which until recently they insisted would not be necessary, was undertaken to save the once mighty companies from imminent collapse.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," said Treasury Secretary Henry Paulson in unveiling the complicated temporary takeover plan.

A breakdown at Fannie Mae or Freddie Mac would have had broad ramifications for the economy, he said, not only making mortgages scarce but making auto and other consumer loans harder to get. He also said that if the companies faltered household wealth and savings would suffer, which would hurt the economy even more since residences are the biggest investments that most Americans have.

"A failure would be harmful for economic growth and job creation. That is why we have taken these actions today," he said.

Under the plan, the Treasury and the Federal Housing Finance Agency will take over Fannie and Freddie under a so-called conservatorship, replacing their chief executives and eliminating their stock dividends.

The Treasury will purchase up to $100 billion of senior-preferred stock in each company to make sure that the companies maintain a positive net worth. It will also provide short-term funding to Fannie Mae, Freddie Mac and 12 federal home-loan banks, and purchase $5 billion of their guaranteed mortgage bonds by the end of this month.

Treasury also appointed new managers for the companies: Herbert Allison, former chief executive of the pension fund TIAA-Cref, will take over as Fannie Mae's new CEO, while David Moffett, a former vice chairman of U.S. Bancorp, will head Freddie Mac. The current CEOs of Fannie Mae and Freddie Mac, Daniel Mudd and Richard Syron, respectively, will serve as consultants during a transition period.

James Lockhart, the housing finance agency's director, said Sunday's action was prompted by a belief in government that the companies "cannot continue to operate safely and soundly and fulfill their critical public mission without significant action."

The takeover, which will last at least until the end of next year, aims to preserve the companies largely in their current form as quasi-governmental agencies and keep them solvent until Congress and the new president can decide how to restructure them for the long term, Mr. Paulson said.

"Only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission," he said. "The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market."

The plan took a step toward resolving one major long-term question, however, by requiring the companies to drastically pare their huge portfolios of mortgage loans as a condition of receiving Treasury's stock investment.

Fannie Mae and Freddie Mac would be allowed to increase their porfolios until the end of next year from about $750 billion apiece now to no more than $850 billion. After that, they would be required to reduce the portfolios by 10 percent a year for about a decade until they reach $250 billion apiece.

The Treasury's cash infusions would follow a complicated playbook. Under the plan, the government will immediately take a $1 billion equity stake in each company that could grow to be as large as $100 billion each and which would be senior to both existing preferred and common shares.

The senior preferred stock obtained by the Treasury will carry warrants that will give the government an ownership stake of 79.9 percent among other benefits.

Treasury also set up a program under which it would buy mortgage-backed securities currently held by Fannie Mae and Freddie Mac to pump fresh funds into the mortgage market through the end of next year., as a way to keep mortgages widely available.

The financing scheme does not eliminate existing common and preferred stock, but requires existing shareholders to absorb any losses before the government does. Over time, if Fannie Mae and Freddie Mac emerge from this restructuring healthy and profitable again, stockholders may benefit.

Mr. Paulson also insisted that, despite the potential $200 billion of funds the Treasury is prepared to give Fannie Mae and Freddie Mac, taxpayers will not necessarily lose out. If the bailout works and enables the housing and mortgages markets to recover, he said, Treasury might make a profit from its investments.