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.”
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.
The government appointed new management at the agencies: Herbert Allison, former chief executive of pension fund TIAA-CREF, will take over as Fannie’s new CEO, while David Moffett, who used to serve as vice chairman of U.S. Bancorp, will head Freddie. The current CEOs of Fannie and Freddie, Daniel Mudd and Richard Syron, respectively, will serve as consultants in a transition period.
Mr. Paulson insisted that, despite the $200 billion of funds the Treasury is prepared to give Fannie and Freddie under the plan, taxpayers need not pay a price if the plan proves effective and enables the housing and mortgage markets to recover. In that case, he said, Treasury might make a profit from its investments.
James Lockhart, the housing finance agency’s director, said Sunday’s action was necessary because the companies were having trouble raising money on their own and could not “continue to operate safely and soundly and fulfill their critical public mission without significant action.” Market confidence in the companies will be tested as they roll over an estimated $225 billion in debt before the end of the month.
One area that will be cut back immediately is lobbying and other political activities, which Mr. Lockhart said must cease. Officials at Fannie and Freddie, which are major employers in the Washington area, declined to comment. Company employees are scheduled to meet with the new executives Monday morning.
The temporary takeover will last until the end of next year, giving the next administration and Congress time to decide whether to continue it and what to do with the agencies in the long term.