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.