Sunday, September 07, 2008

Treasury to Outline Fannie Mae and Freddie Mac Bailout

Treasury to Outline Fan-Fred Plan

By DEBORAH SOLOMON, JAMES R. HAGERTY and DAMIAN PALETTA
Wall Street Journal
September 7, 2008 12:42 a.m.

The U.S. Treasury is expected to announce early Sunday afternoon details of a plan under which regulators will effectively take temporary control over government-sponsored mortgage investors Fannie Mae and Freddie Mac.

The Treasury won't necessarily make a large injection of capital immediately into the ailing companies, which provide the bulk of funding for U.S. home mortgages. But people familiar with the plan said the Treasury will stand ready to provide capital as needed, depending how quickly losses deplete the companies' meager capital holdings.

The Federal Housing Finance Agency, Fannie and Freddie's regulator, is to use its legal powers to put the companies under conservatorship. Those powers allow the FHFA to run the companies indefinitely, under certain conditions, such as when the regulator finds that they are likely to be unable to meet their financial obligations. Fannie and Freddie have run up combined losses totaling about $14 billion over the past four quarters and face heavy additional losses amid the worst surge in U.S. home-mortgage foreclosures since the 1930s.

Fannie and Freddie own or guarantee more than $5 trillion of U.S. home mortgages, nearly half of the total outstanding.

Dividends on the companies' preferred stock are likely to be suspended, people familiar with the plan say, and those on common shares to be eliminated. Any injection of capital by the Treasury would likely greatly reduce or wipe out the value of common shares currently outstanding.

The conservatorship will involve the departure of Daniel Mudd, Fannie's chief executive officer, and Richard Syron, Freddie's chairman and chief executive, though they may not leave immediately and could help with the transition. The FHFA will have to appoint conservators to run the companies and try to restore them to financial health. Officials of the companies were meeting Saturday with regulators to learn more details of the plan, which appears to have come as a surprise to their senior executives, who were summoned Friday to meetings with top officials from the Treasury, FHFA and Federal Reserve.

The longer-run future of the companies will be up to Congress, which created both of them to support the housing market, as well as the next administration.

Treasury Secretary Henry Paulson briefed Sen. Barack Obama, the Democratic presidential nominee, on Friday and spoke on Saturday with Sen. John McCain, the Republican nominee.

In a statement Saturday, Sen. Obama called the situation "extremely serious" and said it affects "our entire economy." He added: "Any action we take must be focused not on the whims of lobbyists and special interests worried about their bonuses and hourly fees, but on whether it will strengthen our economy and help struggling homeowners."

Sen. Obama said the rescue also "must protect taxpayers, not bail out the shareholders and management of Fannie Mae and Freddie Mac."

Alaska Governor Sarah Palin, the Republican nominee for vice president, said during a rally Saturday afternoon in Colorado Springs, Colo., that Fannie and Freddie have "gotten too big and too expensive to the taxpayers." She added: "A McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

The plan will also likely face immediate scrutiny from Congress as it returns from a lengthy recess next week.

House Financial Services Committee Chairman Barney Frank (D., Mass.) said he was "pleased" after a conversation he had late Friday with Mr. Paulson about Treasury's "strong reaffirmation that the vital roles these institutions play in our nation's housing markets must continue."

Mr. Frank said he would evaluate any plan by how it protects taxpayers, restores stability to financial markets and ensures the availability of affordable housing.

Speaker of the House Nancy Pelosi (D., Calif.) said she would work "in a bipartisan manner" with Mr. Paulson, other Bush administration officials and congressional leaders to review the plan "to ensure that the interests of taxpayers and the broader economy are protected."

--Laura Meckler

Write to Deborah Solomon at deborah.solomon@wsj.com2, James R. Hagerty at bob.hagerty@wsj.com3 and Damian Paletta at damian.paletta@wsj.com4

URL for this article:
http://online.wsj.com/article/SB122073255846107191.html

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