US takes over Fannie, Freddie in bid to ease finance crisis
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The US government took over mortgage giants Fannie Mae and Freddie Mac on Sunday, placing them in a "conservatorship" to help avert a financial system meltdown from the housing crisis.
Treasury Secretary Henry Paulson announced the US regulator was seizing control of the government-chartered, shareholder-owned firms underpinning trillions of dollars of home loans.
The move constitutes a massive government intervention in the financial system in an effort to contain the damage from the worst housing slump in decades, which has rippled through the banking system and led to multibillion-dollar losses for Fannie and Freddie.
“The plan is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the two government-sponsored enterprises, or GSEs,” Paulson said.
"Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking," he said in a statement.
New chief executives have been installed as part of the action that Paulson said was needed in view of "the inherent conflict and flawed business model embedded in the GSE structure.
Departing CEOs Dan Mudd of Fannie Mae and Dick Syron of Freddie Mac "have agreed to stay on for a period to help with the transition," Paulson said.
Federal Reserve chairman Ben Bernanke, part of frantic several days of talks to come up with the rescue plan, lauded the effort.
"These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," Bernanke said in a statement.
One key element in the plan enables the Treasury and Federal Housing Finance Agency to purchase a new class of preferred stock in the firms that "will ensure that each company maintains a positive net worth," Paulson said.
Cash to be injected
The Treasury will initially purchase one billion dollars in shares in each of the firms, but will have the authority to boost that total to $100 billion in each.
This will mean cash will be injected as needed, an action "more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set."
"With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers," the Treasury chief said.
"Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares," he added.
Another step authorised by emergency legislation passed by Congress in July opens up a new, unspecified, Treasury line of credit to the two firms through the Federal Reserve.
"This facility is intended to serve as an ultimate liquidity backstop and will be available through December 2009,” Paulson said.
Treasury Secretary Henry Paulson announced the US regulator was seizing control of the government-chartered, shareholder-owned firms underpinning trillions of dollars of home loans.
The move constitutes a massive government intervention in the financial system in an effort to contain the damage from the worst housing slump in decades, which has rippled through the banking system and led to multibillion-dollar losses for Fannie and Freddie.
“The plan is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the two government-sponsored enterprises, or GSEs,” Paulson said.
"Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking," he said in a statement.
New chief executives have been installed as part of the action that Paulson said was needed in view of "the inherent conflict and flawed business model embedded in the GSE structure.
Departing CEOs Dan Mudd of Fannie Mae and Dick Syron of Freddie Mac "have agreed to stay on for a period to help with the transition," Paulson said.
Federal Reserve chairman Ben Bernanke, part of frantic several days of talks to come up with the rescue plan, lauded the effort.
"These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," Bernanke said in a statement.
One key element in the plan enables the Treasury and Federal Housing Finance Agency to purchase a new class of preferred stock in the firms that "will ensure that each company maintains a positive net worth," Paulson said.
Cash to be injected
The Treasury will initially purchase one billion dollars in shares in each of the firms, but will have the authority to boost that total to $100 billion in each.
This will mean cash will be injected as needed, an action "more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set."
"With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers," the Treasury chief said.
"Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares," he added.
Another step authorised by emergency legislation passed by Congress in July opens up a new, unspecified, Treasury line of credit to the two firms through the Federal Reserve.
"This facility is intended to serve as an ultimate liquidity backstop and will be available through December 2009,” Paulson said.
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