Paulson Announces Fed Intervention of Fannie, Freddie

U.S. Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart on Sunday placed the Fannie Mae and Freddie Mac in a government-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent. 
 
"Some of this is a stop-gap to try to prevent the mortgage market from falling apart,'' former Federal Reserve Bank of St. Louis President William Poole said in an interview on Bloomberg Radio. The federally chartered, shareholder-owned structure, with risks covered by taxpayers, is "an unacceptable situation,'' he said, projecting the Treasury may need to cover as much as $300 billion of losses. 
 
Yesterday's action leaves open the option favored by former Federal Reserve Chairman Alan Greenspan, to split up and sell off the companies, or a full nationalization that would cement the government's role in mortgage markets. Avoiding a decision on the issue enhances the likelihood of congressional backing for the emergency steps, Democratic Senator Charles Schumer said. 
 
"The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market,'' Paulson said yesterday in Washington. There is a consensus now that ``they cannot continue in their current form,'' he added. 
 
The FHFA, which will run the conservatorship, ejected Fannie CEO Daniel Mudd, 50, and Freddie CEO Richard Syron, 64. They were replaced by Herbert Allison, 65, former CEO of TIAA- Cref, and David Moffett, 56, who was a US Bancorp vice chairman. 
 
The Treasury also said yesterday it will provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market. 
 
"This is not a permanent solution -- they've not saved Fannie and Freddie, what they've done is they've bought 15 months,'' said Bill Ackman, founder of Pershing Square Capital Management in New York, which has sold short the two companies, or bet on declines in their securities. "It's a band aid. They haven't permanently recapitalized the companies.''

Published on September 8, 2008