U.S. Seizes Control Of Mortgage Giants

"If this doesn't work, there aren't too many more arrows in the quiver," he said.

The seizure of the two companies has broad implications for Washington, Wall Street and international markets.

The biggest winners are holders of Fannie and Freddie debt, including investors as varied as Asian central banks and municipal pension funds in the United States. These bonds, which have been perceived as somewhat more risky in recent months, now in effect have an explicit U.S. government guarantee behind them.

Investors in Asia responded enthusiastically to the Treasury announcement. In early trading today, they drove the MSCI Asia-Pacific Finance up 6.8 percent, the biggest jump since October 1998.

"We think it's a very positive action by the U.S. It has come from being an invisible regulator and to coming to the front lines to save the market," said Wang Zhaowen, a spokesman for Bank of China, which in recent months had trimmed its debt holdings by about 29 percent to $7.5 billion.

Meanwhile, owners of stock in the two firms have incurred major losses. The companies' new federal overseers have eliminated dividend payments by the companies. And the government has, in Wall Street terminology, crammed down current shareholders; shareholders previously had an economic interest that represented 100 percent of the value of the companies, and now their holdings represent 20 percent of the value of each company. The other 80 percent is owned by the government.

If the companies return to profitability, shareholders could end up with a smaller piece of the larger pie.

Many banks hold preferred shares of the companies. The government has ordered that dividend payments to those investors be canceled as well, which could seriously reduce their value and cause some small and midsize banks to encounter financial troubles; some analysts have even predicted that the events could cause a few dozen such banks to go under.

Government officials considered that risk as they weighed a bailout, and concluded that the banks were few enough and small enough that their losses would not cause a broad breakdown in the financial system. Banking regulators, however, will try to nurse those banks back to health, by being as flexible as the law allows them to raise new cash in an orderly way.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said the panel would explore whether the government could act directly to help the banks.

As the housing crisis deepened this year and losses mounted at Fannie and Freddie, investors began to lose faith that the companies' debts would be safe. Across the government and financial world, there was a consensus that their failure could bring the economy and financial system to its knees. In July, Paulson asked for -- and got -- authority from Congress to infuse government money in the firms if he deemed it necessary.

In the ensuing weeks, as Treasury officials, along with investment bankers they hired from Morgan Stanley and officials from other agencies, looked into the details of the companies' financial position, they didn't like what they saw.