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Freddie, Fannie Have Agreed To Rescue Plan

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The New York Times

Published: September 7, 2008

WASHINGTON - Fannie Mae and Freddie Mac agreed on Saturday afternoon to the Bush administration's plan to rescue them, people briefed on the plan said.

Under the plan, the Treasury Department will buy billions of dollars in new mortgage securities issued by the companies and inject an unknown amount of capital into them in quarterly installments, these people said.

The government plans to announce today that it will take control of the mortgage finance giants, remove the top executives and their boards, and appoint a conservator to begin to nurse them back to health. Senior government officials, including Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke, and James Lockhart, top regulator for the companies, informed their top executives about the plan in meetings Friday and Saturday.

The moves by the Bush administration hold the prospect of becoming the biggest government-funded bailout of private industry in American history. They would put the federal government in control of institutions that finance or guarantee about half of all the mortgages in the country.

The administration is not expected to say how much the bailout ultimately will cost, in part because it does not know for how much the Treasury will be able to ultimately sell the assets. It could be politically uncomfortable to put a price tag on a huge bailout only two months before the presidential election. The Congressional Budget Office said two months ago that it was impossible to say how much a bailout would cost, but estimated $25 billion based on the companies' projected losses at the time.

The government hopes to restore the companies' health. Treasury officials have assured lawmakers that in the short term they intend to make Fannie and Freddie as strong as possible so they can help pull the housing market out of its slump.

Shareholders of both companies will suffer, however. The companies would stop paying dividends on their common shares, and any new capital provided by the Treasury Department would have financial priority over the existing preferred and common stock.
Treasury officials and lawmakers were tight-lipped about the plan on Saturday, but several key Democrats expressed cautious support.

"I am pleased by the secretary's strong reaffirmation that the vital roles these institutions play in our nation's housing markets must continue," said Rep. Barney Frank, D-Mass., House Financial Services Committee chairman.

It was unclear what the Treasury Department would allow the companies to do with capital that it provides them. One basic alternative for using the money would be to shore up the companies' balance sheets and shield them from insolvency.

By some measures, Freddie Mac's losses have brought it to the brink of insolvency. Fannie Mae is only slightly less vulnerable.

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