U.S. Nears Rescue Plan For Fannie And Freddie
Saturday, September 6, 2008
The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives and prop them up financially, federal officials told the two companies yesterday, according to three sources familiar with the conversations.
Under the plan, which could prompt one of the most sweeping government interventions in financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies' common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares might be protected by the government.
Instead of giving each company a big capital infusion upfront, the government could make quarterly injections as the companies' losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.
The timing of government action remained unclear last night, and the final details were still under discussion. But as the pace of discussions accelerated, Treasury officials contacted senior congressional leaders yesterday, telling them they might be briefed on the plan this weekend and asking for telephone numbers where they could be reached.
The action would represent a major escalation of the government's role in private lending. The government would be assuming vast obligations it has historically disavowed, potentially using taxpayer money to make up for private business decisions gone wrong.
In an effort to contain the most profound financial crisis in generations, Treasury Secretary Henry M. Paulson Jr., leaders of the Federal Reserve and other government officials have in recent months upended decades of precedent. A bailout of the two mortgage finance titans would follow a Fed rescue of investment bank Bear Stearns in March and earlier steps to provide implicit government backing to Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac have backed 70 percent of new mortgages in recent months, but both have incurred vast losses on their loan portfolios as the housing market has tanked. Paulson, the architect of the plan, and other government leaders view the mortgage firms as vital to preventing an even broader financial crisis and economic downturn.
The chief executives of the two companies were called into afternoon meetings yesterday at the 17th Street NW offices of the Federal Housing Finance Agency, their direct regulator, sources familiar with the events said.
Executives of the two companies were told to show up without being told of an agenda. Daniel H. Mudd, chief executive of Fannie Mae, was accompanied by lawyers from Sullivan and Cromwell, the company's outside counsel. He arrived at 3 p.m. for a two-hour meeting. Richard F. Syron, chief executive of Freddie Mac, began his meeting at about 5 p.m., accompanied by several members of the Freddie Mac board and lawyers from the firm Covington and Burling.
The boards of Fannie Mae and Freddie Mac both plan to convene today.
Paulson, Federal Reserve Chairman Ben S. Bernanke and James Lockhart, the director of the housing finance regulator, told the executives of the plan, which would strip them of their jobs but not include any broader management shake-up.
The plan was described by three sources: an official, a former official who was told of the plans and a mortgage industry executive with direct information. They spoke on condition of anonymity because its specifics had yet to be announced.