Treasury takes over Fannie, Freddie

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By Patrice Hill

The Treasury Department on Sunday seized control of Fannie Mae and Freddie Mac in an effort to stabilize the mortgage and global finance markets, opening the door for what likely is to be a major restructuring and downsizing of the mortgage giants in the next administration.

While the massive and unprecedented takeover appears set to become the largest financial bailout in history, Treasury Secretary Henry M. Paulson Jr. said his immediate goal simply is 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 change them in the long term.

"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," he said. "There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form ... . Only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission."

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For now, he said the Treasury's plan to infuse up to $200 billion of cash into the mortgage giants through a complicated series of moves designed to protect the interests of taxpayers was necessary to prevent a potential collapse in the housing and finance markets from pulling down the rest of the economy.

"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," Mr. Paulson said.

A breakdown at Fannie or Freddie would have had broad ramifications for the economy, he said, not only making home loans scarce but making auto and other consumer loans harder to get. He said it also would have diminished household wealth and savings by putting further pressure on home prices. Homes represent the biggest investment of most Americans.

Under the financing scheme set in motion Sunday, 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 as needed to maintain a positive net worth. It also will provide short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase $5 billion of their guaranteed mortgage bonds by the end of this month.