Government Plans Takeover Of Fannie Mae, Freddie Mac

WASHINGTON — The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.

Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.

Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the troubled companies into a conservatorship.

The news, first reported on The Wall Street Journal's Web site, came after stock markets closed. In after-hours trading Fannie Mae's shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell $1.06, or almost 21 percent, to $4.04. Common stock in the companies will be worth little to nothing after the government's actions.

The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.

That confirmed what investors saw in Fannie and Freddie's recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.

Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.

While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.

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Many in Washington and on Wall Street hadn't expected Treasury Secretary Henry Paulson to intervene unless the companies had trouble issuing debt to fund their operations.

This summer, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed.

Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.

Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages _ almost half the nation's total.

Representatives of Fannie and Freddie declined to comment on the government assistance plan.

Treasury spokeswoman Brookly McLaughlin said officials "have been in regular communications" with Fannie and Freddie, but refused to comment saying, "We are not going to comment on rumors."

Concern has been growing that a government rescue of Fannie and Freddie could not only wipe out common stockholders, but also be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares.

Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies.

The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.

Mudd, the son of TV anchor Roger Mudd, was elevated to Fannie Mae's top post in December 2004 when chief executive Franklin Raines and chief financial officer Timothy Howard were swept out of office in an accounting scandal. Syron was named Freddie Mac's CEO in 2003, replacing former chief Gregory Parseghian, who was ousted in after being implicated in accounting irregularities.

He formerly was executive chairman of Thermo Electron Corp., a Waltham, Mass.-based maker of scientific equipment, served head of the American Stock Exchange was president of the Federal Reserve Bank of Boston in the early 1990s.

Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.

A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.

But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.

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AP Business Writers Martin Crutsinger and Jeannine Aversa contributed to this report.

Comments

[optech007]

"Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt"

Countries like China, Japan, Korea, and probably some of the Gulf States are the holders of this debt. They want to be paid and it seems by doing this the government will pay them. However, we already are running our government on a deficit so in order pay China, Japan, etc. the money they're owed, we'll have to borrow the money. And who do we borrow money from? We borrow from China, Japan, etc. the same people that hold Fannie and Freddie debt. So we're going to have borrow money from them to pay back the money the government will now owe them.

Essentially, we're now borrowing from Paul to pay Paul.

[guntotinganglion]

It's called a snake eating it's own tail. It's also called A CRIME. The level of fraud over the last 8 years has been stunning, even for the malevolent Republicans of old...the neoconvicts are really after the world record, or dare I say, gold medal, for government fraud and corruption.

I loved when the Rpigs referred to the "do nothing" Congress in their speeches. That is laughingly ironic when you consider that this last term has set the all-time record for obstructionist tactics by the R'pigs. In other words, through their abuse of the filibuster, they've stopped legislation cold, and then they point their fingers as if were the Demos who were the "do nothing" people, when in fact, the Republicans used their time honored misuse of the filibuster (which they stopped the government with in 1993 to give the finger to Bill Clinton) to once again, stop everything. Basically, if they don't get what they want, no one gets anything. Bastards.

[Weathermaker]

This will be, by far, the largest trick pulled by this administration on the American people. And guess what, the ignorant middle class not only won't even notice, they will applaud it. Let me explain.

Today, Fannie's and Freddie's 5 trillion dollars in liabilities are held by super wealthy entities (pension funds, foreign banks, other banks, etc). Today, these super wealthy are losing money, because our homes are worth less than they were when they gave us the dough to purchase these homes. So instead of taking the loss on a bad investment, the Bushies will pass the entire hole into the hands of the "we the people". How? By adding any loss on top of our 9 trillion dollar national debt.

Since the wealthy will not have to foot the bill, the markets will rally and the people will look at the DOW and say "see, the economy is fine". They'll elect McCain who'll cut corporate taxes, so that the super wealthy won't even have to repay the huge hole they created. We WILL!! Isn't this priceless?????

[iheardthisbefore]

This is one of the biggest mistakes that this government has ever made and will cost
the American taxpayer dearly....­and for what?

[hockeynut]

BOB WOODWARD ON LARRY KING MONDAY NIGHT!!

[Americatortures]

Isn't he the same snivelling shmuck who wrote what a great guy Bush was ...and how he made soul-searching attempts to decide to go into IRAQ?? thanks...b­ut I'll be swatching the HGTV channel then...the­y're painting a wall ECRU!!!

[Americatortures]

BFD!! HE's a two-sided coin!!! With TAILS on both sides of the coin!!!

[playera]

Bush Legacy


SOCIALISM


Hey, can I maybe get a job there?

[AddictedToHope]

I think socialism at least tries to attend to those at the bottom.

We're heading for serfdom. Check the definitions:

Socialism: political system of communal ownership: a political theory or system in which the means of production and distribution are controlled by the people and operated according to equity and fairness rather than market principles

Serfdom: The serfs comprised the vast majority of the population of medieval Europe and worked to feed themselves, their superiors, and the people of the towns and the church. Although the serfs were not slaves, they were not really free. They could not leave the manor—that is, the land owned by their lord. They were obligated to provide physical labor as well as to pay taxes and other obligations. Serfs were at the bottom of the European system of social, political, and economic relations.

[netzwerg]

"My friends, our economy remains fundamentally strong." John McCain "Presidential" Candidate

Nothing to see here, move ahead!

[cdembrey]

When will they ever learn?
When will they ever learn?

Pete Seeger, 1961

[Richterscale]

Yay! Corporate welfare is an American value.

[Americatortures]

...but...N­OT healthcare!!!

[MadAppraiser]

Actually, Attorney Michelle Obama was not critical enough of corporate America! Economic reality is a monster! The bottom line of corporate America’s financial sector is becoming unaffordable for 95% of America’s population.

Lower taxes are quite a consolation when political cronies subsidize corporate employment outsourcing. America is losing its economic a$$ in slow motion, and the corporate media is celebrating republican political plastic!!!

America’s financial institutions are approaching upside down status on the verge of collapse. As America is singing, and dancing at political parties ignoring the impending economic storms, as though it was Sunday morning. It is tragic when we anticipate a successful outcome with political program variables that have been costly failures in the past! America as we celebrate the new republican plastic we can feel secure, “The economy is strong!!!”

[ProfessorDuh]

You won't see any of that in the corporate media, of course. The real mission of the corporate media is to reassure the public about the benevolence of corporate-welfare capitalism and to justify both inequality and the dominant role of the corporation as the provider of income and benefits.
And when their greed has run the ship into an iceberg, the emergency assignment of the corporate media is to distract the public from the lifeboats until the wealthy are tucked in and safely away.
So keep right on pouring what remains of your money into the stock market, little man. "The fundamentals are sound."

[Tom95134]

In addition to the Freddie Mac & Fannie Mae problems, have you noticed the constant drip, drip, drip of bank failures. There is another one today. These have been relatively small banks but the question that needs to be asked is, "When will there be a failure of a major bank?" Will it happen before the election or will the Bush administration manage to stave it off until after the election and it becomes someone else's problem.

[waverly]

The next administration will face monumental domestic issues as well as foreign issues. McCain and Palin together equals half the intelligence of Obama and then add Biden ... WOW.

The voters had better start evaluating these problems and vote for the ticket who has the wisdom and insight to deal with these problems. It's not about party, it's not about country, it's about YOU ... your money, your job, your liveliness, your future.

[waverly]

... make that livelihood, not liveliness.

[dct1999]

That is what scares me the most. It is only a matter of time before a major bank fails, this economy is not going to turn around quickly because it is simply too messed up.

[rationalindependent]

answer to Tom95134 "Will it happen before the election". AFTER...se­e my post at 1:50pm. FreddieMay had almost $30 bb debt coming due by end of this quarter. There was no way anyone was going to buy that paper. There is $871bb debt coming due by year end with other institutions. If they can roll over these obligations then they can buy some time; but if the appetite for credit dries up in the market place, watch for a meltdown; the fireworks will pale the display of "Shock and Awe". As a smart bond manager said in one of his writings "Dead Banks Walking" and many are heading to "Old Sparky".

[dct1999]

The republicans and their insane zeal for deregulation created this mess. Six years of a republican president, and both houses of Congress with a republican majority. Now I'm not claiming that the democrats don't bear some responsibility. But the bulk of the blame goes to GWB, and his rubber stamping republican cohorts.

But let's not let the others off the hook - the greedy, inept CEOs; the lenders who commited outright fraud against borrowers; the borrowers who took out mortgages they couldn't afford because they thought they could flip like a pro; the borrowers who purchased property without the benefit of a qualified real estate attorney; the borrowers who simply felt they were entitled to a house and didn't bother to do their homework before signing off on ARMs and IOLs.

We are in a recession; banks are collapsing; the government is bailing out these baztards to the tunes of billions of dollars; taxes have been cut for corporations and the super rich; the wars are costing billions of dollars per week; unemployment is above 6%; college loans have been privatized; union jobs are disappearing; people have no health benefits; and GWB tap dances in front of the WH while waiting for his twin John Bush.

And people want Bush III in the WH.

[rationalindependent]

Bush III: Einstein said "the definition of insantiy is doing the same thing over and over again and expecting different results'.

Agree that many are complicit in this debacle. Rep govt propogated 2 major bubbles; but Dems stayed quiet. Both ignored all warnings and failed to take actions that would have avoided crises. So did all people who continued their buying binge. Money flowed freely. Ben was dropping it from "helicopters"! Experts in markets who did warn were labeled "perma bears" and against the "American Dream".

Great deal of blame rests on the American people who seemed to have learned nothing! Stock bubble/ Bust....no biggie govt will bail us out. Next...hou­sing; making only pittance but want Mc Mansion, want 2 houses, cars, plasma TV's, granite, marble everywhere; the Piper says "do I have a great deal for you" and all the adults, overcome by greed followed the Piper . Institutions will always try to profit; but it is the people who have the responsibility to say no thanks! July iphone coming out…must have it ;record lines from people wanting to buy iphones even though headlines screaming financial crises. No one has the discipline to reign in their buying habits even now, with credit cards maxed. Why should we?.BUY everything in sight ...it is the American way. Time to pay the Piper. The govt has no choice but to bailout FreddieMay. The fate of all institutions are interwined. FreddieMay failure now would have major repercussions on the economy.

[dct1999]

Well said, excellent points.

I have friends and relatives who are fortunate enough to have discretionary income but have zero savings. I do not understand that.

[AddictedToHope]

Don't forget, that was W's advice after 9/11. Don't let the terrorists win. GO SHOPPING!!

Don't have cash. Not to worry. CHARGE IT. Take out a home equity loan.

[dadw5boys]

THE BANKS USE TO CONTROL WHO COULD BUY A HOME AND WHERE THEY COULD BUY TOO!!!!

FANNIE MAE WAS CREATED MAINLY TO STOP THIS DISCRIMINATION BUT TO ALSO LIMIT THE POWER OF BANKS.

Fannie Mae was so successful that Freddie Mac came to be for Commerical Property at first to end discrimination there too.

These are the little tid bits that the Republican leave out !!!!!

[imusintheevening]

Talk about entitlements. The CEO of Fannie Mae making $38 million for being in charge while the implosion that will cost us hundreds of billions occurs.

It's a lot like the GOP claiming to have keep us safe from terrorists, while in fact, after being repeatedly warned, 'W' went to clear brush and Rice was barking about defensive missiles when the planes came.

Up is Down, Black is White.....­....

[rationalindependent]

In July, Hank said "not worried"" adequately capitalized" "aid is temporary" "no bailout was necessary" ; tho everyone with a financial background and half a brain saw the writing on the wall.

"Cost $25 bb."...u kidding?! Estimates I have seen are as high as $300-$500 bb to get FNM, FRE on the right path. They have over $150 bb and $216bb each, Level 3 assets I believe, most is subprime. "We the people" will soon be unwilling shareholders in FreddieMay; or FannieMac!

Interesting that financial crises I have seen: Chrysler debacle, Citi bailout, Continental Illinois, Long Term Capital, Bear Stearns all were bailouts during a Republican presidency - Reagan, Bush Sr. and Bush Jr. Free markets are supposed to work both ways in boom and bust. Bust cycles are market's way of tempering irresponsible risk taking and failed judgment. Bailing out banks will cause banks and people to take risk again.

It is far from over. LEH, WM, WB, GM, F, C and many others are disasters waiting to happen. Dividend cuts, dilutive stock offerings, private/ foreign equity infusion (many already underwater) are not going to bailout all. Many will fail and where we get capital for all is questionable. Post election, after all soaring rhetoric and promises are over, we will see a full blown crises. Neither candidate has the know how to avoid a meltdown and the repercussion that will reverberate around the globe. Will be interesting to see how they plan to handle it.

[Agent420]

Just like my mother used to say, don't make that face, if the wind changes while you are making that face it will stay that way forever. He should have listened to him mother.