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Government Takes Control Of Fannie Mae, Freddie Mac. Biggest Financial Bail-out in U.S. History

Deciding mortgage giants Fannie Mae and Freddie Mac no longer had sufficient capital to continue funding home mortgages, the U.S. federal government made the unprecedented decision to seize control of both companies on Sept. 7. It is the biggest financial bail-out in U.S. history.

Treasury Secretary Henry Paulson says both companies will be placed into a conservatorship - a status similar to Chapter 11 bankruptcy - with the Federal Housing Finance Agency overseeing their operations until financial stability can be restored. As part of the government's actions, dividends on both common and preferred shares in Fannie Mae and Freddie Mac will be eliminated in an effort to preserve capital.

The chief executives of the two companies, Fannie Mae's Daniel Mudd and Freddie Mac's Richard Syron, have been fired from their positions. Fannie Mae's new replacement is Herb Allison, former vice chairman of Merrill Lynch; David Moffett, who most recently served as a senior advisor to the private-equity firm Carlyle Group, will take the helm at Freddie Mac.

Fannie Mae and Freddie Mac are federally chartered but shareholder owned. They account for nearly half of the $12 trillion in U.S. home loans. Following the meltdown of the housing market last summer, both companies have recorded almost $15 billion in combined net losses, with share prices down more than 90% this year.

The companies' financial woes were made even worse on Sept. 5 when the Mortgage Bankers Association reported that 9% of homeowners with a mortgage are either behind on payments or in foreclosure.

Unknown Factors

A number of uncertainties remain regarding the government's takeover of Fannie Mae and Freddie Mac, not the least of which is cost. Government bailouts typically end up causing a massive drain on taxpayer dollars, and while Secretary Paulson did not put an exact price tag on the government's plan, the Congressional Budget Office (CBO) gave an estimate of $25 billion two months ago.

As reported Sept. 7 on Bloomberg.com, the Treasury Department will now purchase up to $100 billion of senior-preferred stock in Fannie Mae and Freddie Mac on an as-needed basic to maintain a positive net worth. The government also will provide secured short-term funding to the two mortgage companies and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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