Treasury to Rescue Fannie and Freddie

Instead of making a one-time cash infusion to keep the companies afloat, the government will make quarterly investments, to the degree that market conditions require. That way, in Treasury officials' view, investors can have confidence of a ready source of cash if the firms need it, but taxpayers need not be put on the hook anymore than necessary. The companies' shares are off about 90 percent from their highs in the past year.

The impact of the Treasury plan on stockholders in the two companies remains unclear. The conservatorship itself would not affect the value of shares. That would only happen as Treasury actually pumps money into the companies.

If the companies perform well in coming months, the government will not have to invest much money, if any, and shareholders will not suffer much. If the companies perform poorly and the government makes massive infusions, shareholders could lose their shirts.

The Treasury Department has told banking industry representatives and members of Congress that it is sensitive to concerns that a wipeout of shareholders' value could damage the viability of many banks.

The government could choose to reduce the value of the shares, for example by suspending dividend payments. One industry expert said a possible model could be the bailout of Continental Illinois, the largest banking bailout in the 1980s. In that case, the government gave shareholders a 20 percent stake in the company, which it then reduced as losses grew.

Fannie Mae was created during the Great Depression as a government support for home mortgage lending. In 1968, Congress spun it off as a hybrid for-profit and government enterprise, meaning it has both a government policy mission -- to support affordable housing and homeownership -- and a profit motive. Soon after, it created Freddie Mac in the same mold. The companies are not required to pay state and local income taxes. However, their shares are also listed on the New York Stock Exchange, and they pay their top executives multimillion dollar salaries.

Fannie Mae, based in an elegant brick headquarters on Wisconsin Avenue in Northwest Washington, and Freddie Mac, based in an office park in McLean, buy mortgages from banks, hold on to some and package others that they sell to investors around the world. This year they have funded more than two-thirds of new mortgages.

For years, they played high-profile roles in the political and civic life of Washington, hiring armies of lobbyists to help protect their unique status and, through foundations, giving vast amounts of money to charities large and small. That began changing with a series of accounting scandals beginning in 2003. The housing crisis raised more questions about their structure and operations.

Obama yesterday said any rescue plan must "not bail out the shareholders and management of Fannie Mae and Freddie Mac," though he noted the wide exposure of community and regional banks to the companies' shares. He said the plan must clarify "the true public and private status" of the companies. He also said it must be good for the overall economy.

McCain said that the times are "tough" and that "today we're looking at a federal bailout of our home loan agencies."

Palin said: "The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. A McCain-Palin administration will make them smaller, and smarter and more effective for the homeowners they help."

Staff writers David S. Hilzenrath, Neil Irwin, Michael D. Shear, with McCain and Palin, and Peter Slevin, with Obama, contributed to this report.