U.S. Treasury to Bring Fannie Mae, Freddie Mac GSEs Under Government Control

September 5, 2008 by · Leave a Comment
Filed under: Economic News 

After many rumors, this one comes true. We are bailing out our two largest GSEs Freddie and Fannie. After the market close on Friday the Treasury unveiled their plans to bring the two GSEs into government conservator-ship. Both CEOs have been removed from the jobs as they come under public control.

The New Yorks Times reported that in the scenario the common and preferred shareholders might lose sustaintial value in their investments. It will be interesting to see if they don’t actually bail out those shareholders as well. Any way you cut it this nationalization will be inflationary over the long run.

Article:

Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control, seeking to halt the crisis of confidence in the companies that make up almost half the U.S. mortgage market.

Paulson met with Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron yesterday to brief them on the decision to put the companies into a conservatorship, where they would be removed from their jobs, according to a person briefed on the discussions. A public announcement is expected this weekend, the person said.

The decision follows the Treasury chief’s repeated comments to lawmakers in July that he wasn’t likely to use taxpayer funds to prop up the federally chartered, shareholder-owned firms hit by $14.9 billion in losses the past year. The shares of both companies slid since Paulson won powers to inject unlimited funds in the companies, and their borrowing costs rose.

Pacific Investment Management Co., manager of the world’s biggest bond fund, and other large investors may put in their own money once the Treasury decides to inject government funds, said Newport Beach, California-based Pimco fund manager Bill Gross, in a Bloomberg Television interview.

“They have to open their wallet,” Gross said, predicting that the Treasury will act this weekend before the Federal Housing Finance Agency releases an assessment of Fannie’s and Freddie’s capital.

Briefing Campaigns

Paulson gathered with Federal Reserve Chairman Ben S. Bernanke, FHFA director James Lockhart, Syron and Mudd in Washington. The Treasury plans to brief Democratic presidential candidate Barack Obama’s campaign team today and has contacted Republican contender John McCain’s staff about its intentions.

The meetings come a month after Paulson hired Morgan Stanley to advise on any use of taxpayer funds to re-capitalize Fannie and Freddie, which account for almost half of the $12 trillion mortgage market. A government takeover would be the latest attempt to blunt the impact of the yearlong credit crisis, after the Fed provided financing for Bear Stearns Cos.’s takeover by JPMorgan Chase & Co.

Washington-based Fannie and Freddie dropped in after-hours trading. Fannie fell $2.25, or 32 percent, to $4.79 at 5:50 p.m. in New York Stock Exchange trading and Freddie slumped $1.40, or 27 percent, to $3.70.

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