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Intervention to be costly for taxpayers, probably won't solve all problems
By Gretchen Morgenson
and Charles Duhigg
New York Times
Published on Sunday, Sep 07, 2008
A federal government takeover of mortgage giants Fannie Mae and Freddie Mac, expected to be announced today, probably will be among the most expensive rescues ever financed by taxpayers.
While it is not yet possible to calculate the cost of the government's intervention, it could rise into tens of billions of dollars.
Already, the housing crisis has cost investors and consumers hundreds of billions of dollars.
The big question is whether the government's move to take over Fannie and Freddie will restore investor confidence in the nation's credit markets, help stabilize the stock market and keep loans flowing to creditworthy borrowers.
The plan to take over Fannie and Freddie came together hurriedly after advisers poring over the companies' books for the Treasury Department concluded that Freddie's accounting methods had overstated its capital cushion, according to regulatory officials briefed on the mat
ter.
The proposal to place both companies, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies' debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.
The details of the deal have not fully emerged, but it appears that investors who own the companies' common stock will be virtually wiped out; preferred shareholders, who have priority over other shareholders, may also end up with little.
Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.
The takeover comes on the heels of a rescue of the investment bank Bear Stearns, which was sold to JPMorgan Chase in a deal backed by taxpayer dollars.
Candidates' support
Both presidential nominees expressed support for the takeover. Sen. Barack Obama, D-Ill., said as he campaigned in Indiana that not acting could place the housing market in further distress.
''These entities are so big and they are so tied into the housing market that it is probably true that we have to take steps to make sure they don't just collapse,'' Obama told an audience in Terre Haute on Saturday. But he added that the government needed to take steps to guard against Fannie Mae and Freddie Mac ultimately profiting from the government assistance.
Sen. John McCain, R-Ariz., has long been critical of the mortgage finance giants.
His running mate, Gov. Sarah Palin, spoke out from a rally in Colorado Springs.
''Fannie Mae and Freddie Mac, they've gotten too big and too expensive to the taxpayers,'' Palin said. ''The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help.''
Good news, bad news
Fannie and Freddie, by buying mortgages, provide banks and other financial institutions with fresh money to make new loans, a vital lubricant for the housing and credit markets.
As a result of the government's intervention, the cost of borrowing for Fannie Mae and Freddie Mac should decline, because the government will be insuring their debts. Equally important, because the government is backing the companies, they will continue to buy and sell home loans.
But the plan will probably do little to stop home prices from falling. And foreclosures are almost certain to rise.
Just a week ago, Treasury officials were still considering a wide variety of options for Fannie Mae and Freddie Mac, ranging from doing nothing to taking over the companies completely, according to people with knowledge of the discussions.
Treasury Secretary Henry Paulson, who won authority from Congress last month to use tax money to bolster the companies, said he hoped never to use that power.
Last week, advisers from Morgan Stanley hired by the Treasury Department concluded Freddie Mac's capital position was worse than initially imagined, according to people briefed on the findings. The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the company's capital resources and financial stability.
On Friday, executives from Fannie Mae and Freddie Mac were ordered to appear in the offices of their regulator, James Lockhart, in separate meetings, and were told that regulators were exercising their authority to place the companies in conservatorship.
Details of those plans continued to be worked out Saturday.
A federal government takeover of mortgage giants Fannie Mae and Freddie Mac, expected to be announced today, probably will be among the most expensive rescues ever financed by taxpayers.
Get the full article here.
Comments
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Posted 10:16 AM, 09/07/2008
executives robbed the companies over the last five years....while bush slept!
barberton, oh
Posted 10:43 AM, 09/07/2008
What's going to happen to us shareholders of Fannie May if this deal goes through ? R we holding worthless paper and or shares ? The Fed. certainly aren't looking at the best interest of it's shareholders, that's a given !!
akron, oh
Posted 11:13 AM, 09/07/2008
I wouldnt want to be a shareholder.... Unless your going to buy in when it bottoms out from the federal takeover. Hoping it will go back up to a decent level.
Posted 02:36 PM, 09/07/2008
Your shares are already worthless! What are they, under $5.00? If you own them, you should have sold them months and months ago!
Posted 02:38 PM, 09/07/2008
so dennis, is bush the all seeing eye now? I never knew as President, his job was to audit companies....thanks for your great insight
akron, oh
Posted 07:02 PM, 09/07/2008
Didnt W have a few companies that went belly up?
m, m
Posted 08:36 PM, 09/07/2008
and the CEO still enjoys his $38 million pay, while we pay to bail out for his poor judgement. Maybe some of his paycheck could help cover cost of the bailout ??
