Fannie and Freddie To Go Into Conservatorship

 

It looks like we’ll have "Feddie" after all: [Hat tip to John- who was following the latest yesterday]

Sept. 6 (Bloomberg) — 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 tell them of 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.

What about shareholders?

 The Washington Post reported that the government would make quarterly injections of funds as the companies’ losses warranted, avoiding a large up-front taxpayer cost, citing sources it didn’t name. Debt and preferred shares would be protected, and common stock would be diluted while not wiped out, the Post said.

The New York Times said most or all of both the common and preferred shares would be worth little or nothing.

 

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9 Comments for this entry

  1. mcdermott says:
    September 6, 2008 at 7:15 AM

    Debt and preferred shares would be protected, and common stock would be diluted while not wiped out, the Post said.

    As mentioned by Karl Denninger on hish Market Ticker blog, originally the Washington Post said would, but in an update changed it to might.

    http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html?hpid%3Dtopnews&sub=new

  2. mtnmike says:
    September 6, 2008 at 7:35 AM

    I love this line in the reporting, “seeking to halt the crisis of confidence in the companies that make up almost half the U.S. mortgage market.”

    I don’t know about most, but I’m feeling a whole lot better knowing that I personally have become responsible for a portion of the Fannie and Freddie debt rather than those irresponsible shareholders.

  3. John M. says:
    September 6, 2008 at 7:36 AM

    Well Environment Canada has Hanna directly on top of Paulson, Fannie and Freddie as we speak, and right over Wolfville tomorrow morning (we are only supposed to get about 30mm, but Josephine’s track looks a bit like Juan’s, so stand by …)

    But once Ike is finished raking the north shore of Cuba they’ve got the west eye-wall lined up directly on Lake Pontchartrain around the 13th. Don’t think we’ll be too fussed about this story for a while if that holds up :(

    Anyway, since the mortgage grasshoppers can’t quite hold up their end of the GSE book, looks like America’s savers will be taxed to bail out Bill Gross and the Chinese. Go Ants!

    So we all end up getting soaked one way or another as the savers Save the Country (with a subtext that it would be nice to make up some of the shortfall by cutting DoD :) )

    “Government to wipe out Fannie/Freddie shareholders by Sunday”, by Peter Cohan, Blogging Stocks, September 6, 2008.

    And now what could become history’s biggest transfer of tax dollars to bail out bad lending begins. Last month Congress passed a bill that gave the Treasury Department $800 billion to bail out Fannie Mae and Freddie Mac. And while it is unclear how much money will be used to bail them out, the general outlines of the soon-to-be-announced terms are becoming clearer than they were last night.

  4. mtnmike says:
    September 6, 2008 at 8:01 AM

    Note that emergencies such and Bear Stearns, Fannie and Freddie, Silver State Bank, etc. etc. arrive “Late Friday.” Hank “no bailout being considered” Paulsen, and “Bronco” Ben Bernanke are seeing a whole lot of overtime as these “unseen” emergencies just keep on coming”.

  5. jryskmpr says:
    September 6, 2008 at 9:30 AM

    Notice that you don’t see any more “moral hazard” talk from the trailer trash? They’ve all been riding the gravy train (oh I know they’re “independent” and “made it on their own”) and now it’s gone off the rails. Let’s see “moral hazard” keep 300 million people eating. These “moral hazard” dogs have crawled back into their holes.

    Ban housing evictions now.

  6. surak says:
    September 6, 2008 at 9:46 AM

    Twist,

    How much do you think credit is going to tighten up as a result of this??

    Thanks

  7. John M. says:
    September 6, 2008 at 10:04 AM

    Start evicting 70112,70113,…,70145, etc. now might be more to the point, but I digress.

    Radio, TV, Newspaper, there has been almost nothing on up here about the GSEs. The Chronicle Herald cited Gross’ “financial tsunami” remark as a reason for market indexes going down on Thursday, but without any context. This story is about certain profound change (and likely total collapse) of the world financial system. It’s feeble exposure is eerie.

    This guy says it better, though …

    “Freddie/Fannie Plans In Motion; Why Are They Being Underplayed?”, by Paul Kedrosky, Seeking Alpha, September 5, 2008.

    Underplayed?

    Is the Freddie/Fannie bailout plan being underplayed? News late today that Treasury plans are likely to be announced imminently strikes many people, myself included, as one of the biggest financial events in modern memory, and yet it feels underplayed.

    Why do I say that? Well, until recently, it was the second story on the front page of the WSJ this afternoon, and it hadn’t even made the front page of the NY Times site last I looked. Marketplace on NPR, which I listen to most afternoons, shrugged it off in a 15-second drive-by comment as some late-breaking news that the market may have noticed.

    Remarkable stuff. Here is the Federal Government backstopping a massive financial services organization; okay, two of them; okay, the whole frickin’ financial services industry plus the stock market, with China and the rest of the world watching nervously, and it’s being treated as just another day in those nutty ol’ markets.

    But it isn’t just another day in the markets. This is set to be epochal, a true “Where were you when…” moment, a before/after sort of of thing. You can’t make these kinds of massive financial commitments — more than a trillion dollars, at least in notional terms — with so many contingencies, without imagining the kinds of consequences, financial and political, that come with it. After all, the current U.S. administration desperately wanted to punt this past November elections, and it now seems clear that it can’t.

  8. John M. says:
    September 6, 2008 at 10:32 AM

    mcdermott (#1) -

    Interesting catch.

    And speaking of catch, sorry I took so long to find you in Igor’s clutches :(

  9. agnostic says:
    September 7, 2008 at 7:19 AM

    Years from now, if I am around, I will be looking back on this September as the first overt incidence of US fiscal policy being dictated by foreign powers. This is the ultimate price of our so-called prosperity and “ownership society,” what a joke. Well, at least the crumbling of the ownership society started while the tool was still in office. 43: Worst. Ever.

    My new Ryskamp-esque mantra, I think, is “End US Foreign Aid now!”

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