Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say

[Muttocracy]

Source: Washington Post

By David S. Hilzenrath, Neil Irwin, and Zachary A.Goldfarb
Washington Post Staff Writers
Friday, September 5, 2008; 8:33 PM

The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives, and use government funds to prop them up, government officials told the two companies yesterday, according to sources familiar with the conversations.

Under the plan, the federal government would place the firms in a legal state known as conservatorship, the sources said. The value of the company's common stock would be diluted but not wiped out while the holdings of other securities, including company debt and preferred shares, would be protected by the government.

Instead of giving each company a big capital infusion up front, the government plans to make quarterly infusions as the companies' losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.

As the pace of discussions accelerated today, Treasury officials contacted senior congressional leaders, telling them they might be briefed on the plan this weekend and asking for telephone numbers at which they could be reached.

Read more: http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html?hpid=topnews

---

seen first breaking on MSNBC, but they refer to Washington Post
http://www.msnbc.msn.com/id/26567533/


Talk about your Friday news dumps

[Aqaba]

1. TAXPAYER BAILOUT INC.

[avaistheone1]

11. then the taxpayers should own it.

[Aqaba]

12. Oh we will, it will add enormously to our debt

[Ghost Dog]

48. I don't think so. Protecting "Preferred Shareholders" means protecting, essentially, banks:

Treasury's Paulson keeps watch for signs of trouble in the wake of a bailout

By David Cho
The Washington Post
August 26, 2008

and Jeffrey H. Birnbaum


WASHINGTON — A top concern of Treasury Secretary Henry Paulson as he ponders whether to pull the trigger on a rescue plan for mortgage financiers Fannie Mae and Freddie Mac is the fate of its "preferred" shareholders, which include regional and community banks across the nation and central banks around the world, according to private analysts who closely follow the department.

Despite mounting financial woes, Fannie Mae and Freddie Mac have been paying an unusually generous dividend to owners of preferred stock — which is issued to a select class of investors — making the shares popular among banks. Treasury officials are worried that a sell-off of these shares poses serious risks to the broader financial system, the analysts said.

The value of the preferred shares, estimated to be worth $36 billion between the two firms, has taken a hit recently. Moody's Investors Service significantly downgraded some of them last week, saying their dividends could be at risk as the firms falter.

The performance of the preferred shares is one market development Treasury is closely watching as it decides whether to inject government money into the two companies, which back about half of the $12 trillion in mortgages in the United States. The department is also monitoring the confidence of banks, financial firms and investors that lend to Fannie Mae and Freddie Mac on a daily basis.

/... http://www.mailtribune.com/apps/pbcs.dll/article?AID=/20080826/BIZ/808260307/-1/rss05

While 'ordinary' share- and stakeholders (and taxpayers) go to the wall.

[BearSquirrel2]

57. The investors should lose their shirt and the companies should be divided ....

When we have organizations that are "too big to fail" it's a clear sign that the organizations need to be broken up into smaller units that we CAN allow to fail.

All of these companies acted irresponsibly and the investors deserve to loose their money. What's the old saying the conservatives keep saying "caveat emptor"???? Now the supply side sycophants will probably claim that we need to prop up investor confidence. They are afraid investors will pack their money into their mattresses and that the economy will collapse, because in their world all economic activity is driven by investment.

In the real world, we know that investment seeks consumer demand. This is evidenced by the fact that investors expect to make money on their investments and they don't invest unless they expect it. Propping up bad investments only encourages more bad investment. But of course in this case, I think the people in the inner circle know that are current economy is a house of cards.

We are all living now on the full faith and credit of the US Treasury. CEOs are sending our economic engine overseas. They are keeping prices low, but they are not really investing in OUR economy. They're investing in the Chinese economy. In the process they're making themselves spectacularly wealthy. The problem is that the "wealth" is coming from US consumers that are largely maxing out their credit cards and more recently ... spending direct subsidies from the government which is money effectively borrowed from China ... which is where we are sending the bits of capital we actually have.

You see how it works. The CEOs are draining our economy and the credit of the treasury by exploiting the difference in labor value between the US and China. They are sticking us with the bill by lowering tax rates on corporations and the "investing" class.

If the house of cards collapses. It will be bad for us, but this is actually inevitable. It would be really bad for the CEOs as their gravy train would stop and we would actually have to enact financial reform sooner rather than later. That is, we would have to cut up the credit cards and stop digging a deeper hole than we are in right now.

I do believe that the 90s were an anomaly. The investor class was paranoid that if they didn't have a serious "online presence" they would loose all their investments. So they invested copiously. Supply siders might say ... see!!!! But I interpret this as a symptom of poor wealth distribution. Typically, ordinary folk can't afford to stuff 80% of their wealth into their mattresses. They have to spend it in order to live.

The value of "capital" in or modern economies is to provide "startup" funds to develop new economic ventures. It is the money you need to buy equipment and contract services until you can sell your product. At that point the REAL investing happens. A purchase is the most profound type of investment in the economy you can make. Excessive reserves of "capital" beyond the capability to start new ventures is a sign of an unhealthy economy and one that is on the way to recession or depression. When investors can "afford" to stuff their money into their mattresses, it's a REALLY bad sign. Because as we all know, the mattress doesn't pay interest. In fact the mattress devalues capital due to inflation. And only dummies invest seriously in their mattress.

Excess capital curtails the real engine of the economy "consumption". The supply siders have destroyed this concept in pursuit of their logical self serving contortions. They have reduced this nation to a debtor nation, and net exporter of raw materials and a net importer of manufactured goods. Effectively, they've transformed the United States into a 3rd world country with a good credit card. It won't last forever. The sooner we cut up the credit card, the more shallow the hole we will have to climb out of.

[Odin2005]

61. Excellent Post!

IIRC that is exactly what caused the Great Depression.

[Thothmes]

65. How many millions of shares of these stocks

are in the pension funds for teamsters, govt employees, steelworkers, autoworkers, service employees, etc. It is not only the big boys that will take a bath if these two entities collapse.

[harun]

70. Pension money should not be in investments that risky (n/t)

[Thothmes]

72. I fully agree, but up to a couple of years ago

investment in these two entities was considered a very safe bet.

[Captain Hilts]

2. Let's see what happens to those huge salaries and luxury cafeterias.

Probably nothing.

[Prefer]

3. why not the oil industry too

[harun]

71. And Healthcare.

[Kittycat]

4. NYT link with summary

http://www.nytimes.com/2008/09/06/business/06fannie.html?_r=1&hp&oref=slogin

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage-finance giants, that the government is preparing a plan to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.

The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies’ new regulator. The executives were told that under the plan, they and their boards would be replaced, and their shareholders virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in United States history.

[Muttocracy]

6. thanks, more sources is always better. So much for that fundamentally sound economy. nt

[Mojorabbit]

23. Funny

they changed the wording of the first paragraph a bit. The word seize is no longer there. LOL
Now it says.
"Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said."

[jhain]

5. shit

just......shit

[Benevolent]

7. Why don't they bail ME out

Or all of us. I'm struggling to pay my bills. I can't even go to the dentist because the fees are too expensive. Bail me out, Georgie.

[Muttocracy]

8. apparently we get to wait for the invisible hand of the free market

welcome to DU :hi:

[not fooled]

31. The free hand of the market...

...has its middle finger raised in this case

:mad:

Remember, privatize the profits, socialize the losses.

[central scrutinizer]

60. because you are not "too big to fail" so quit whining

[Muttocracy]

9. Another thread on Friday night bank failure:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=3933943&mesg_id=3933943

[lonestarnot]

10. So they are going to cave to the Chinese demands and make us pay the tab.

Swell.

[Pale Blue Dot]

13. Goodbye, America

True, you were a violent psychopath sometimes, but I'm not sure that you deserved it to end this way.

[marmar]

14. Here's the link to a Bloomberg story about it:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aBY8f3smq5k0&refer=home

[Muttocracy]

17. thanks - that one says they'll brief Obama and I have a ?...

"The Treasury plans to brief Democratic presidential candidate Barack Obama's campaign team tomorrow.

Washington-based Fannie and Freddie dropped in after-hours trading. Fannie dropped $2.25, or 32 percent, to $4.79 at 5:50 p.m. in New York Stock Exchange trading and Freddie slumped $1.40, or 27 percent, to $3.70. "

Humor a non-economist here - is this going to hurt the stock market next week, or is the government takeover to prevent that? Are state pension, retirement, etc. funds linked to F&F?

[Yavin4]

26. Who's Going to Brief Sarah Palin?

I'd pay to see that briefing.

[Ghost Dog]

50. Short answer: The ordinary Jane and Joe, via the open-to-the-public

and their pension funds, etc. market, will be hurt much, along with the general stock markets around the world.

The priviliged "preferred" insiders, much less so.

edit: Correct me if I'm wrong.

[Ghost Dog]

49. Thanks. I'd also like to comment:

Where we are informed that:

The Treasury plans to brief Democratic presidential candidate Barack Obama's campaign team tomorrow and has contacted Republican contender John McCain's staff about its intentions.

This would seem to imply that whereas the McInsane campaign was already in on the deal, the Obama campaign will be let in on some of the secret(s) only today, Saturday. Probably right now as we speak.

Partisan, much?

[OhioChick]

15. K&R

Thanks for posting, Joe.

[HughBeaumont]

16. SIIIIIIGGGGHHHH . .. . . . .

House of Cards "Kick the Can" Bewshonomics, coming home to roost.

[RUMMYisFROSTED]

18. Classic TT.

:thumbsup:

[cottonseed]

19. This is the "socializing risk" part of....

"privatizing profit" and socializing risk. Ain't our system grand?

[Muttocracy]

20. exactly. nt

[Neshanic]

21. It's Failure Friday! Yipee! Houses are on the house!

[rainman99]

22. This ticks me off.

Sorry, but I knew that bankers were telling me I could buy more of a house than I really could afford. Why do we have to bail everyone out?

[Yavin4]

25. "Why do we have to bail everyone out? "

We don't bail out everyone. Just the rich people.

[Yavin4]

24. What's Sarah Palin's Position on This?

Sarah? Sarah? Hello?

[Ghost Dog]

51. Didn't you get the memo? They don't do

ISSUES.

They don't do reality either.

[Yavin4]

54. Sort of Like How Subprime Lenders Didn't Think That Income Mattered

Now I get it.

[unblock]

27. well there is a REAL reason to do this sort of thing on a weekend.

this is not just a news dump, this is actual news, and the weekend gives them a fair amount of time while markets are closed to sort everything out and make it a done deal before markets open on monday.

they really can't do this sort of thing during the week, there would be too much random and/or illegal trading based on rumors or inside info.

[Ghost Dog]

52. But observe: Markets are _not_ closed for the privileged insiders

who trade between themselves.

[unblock]

59. true, but both parties are remarkably well informed.

[Muttocracy]

56. I guess that makes sense. nt

[Trillo]

28. "The value of the company's common stock would be diluted

"but not wiped out ... preferred shares, would be protected by the government."

---

Little investors lose, while big investors are protected.

Socialism and bailouts for the uber rich, the dregs of capitalism (share value dilution) for the poorer among us. http://en.wikipedia.org/wiki/Preferred_stock

[swag]

29. Privatize profits, socialize losses.

[WillyT]

30. Big K & R !!!

:kick:

[JCMach1]

32. Sorry, but legally go for bankruptcy then... Why let the investors keep their stock?

[struggle4progress]

33. Fannie, Freddie to be seized

Source: NYT

Government's plan a bailout, officials say
By STEPHEN LABATON and ANDREW ROSS SORKIN New York Times
Sept. 5, 2008, 11:20PM

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of mortgage finance giants Fannie Mae and Freddie Mac that the government was preparing to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.

The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies' new regulator. The executives were told that, under the plan, they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the nation's largest ever.

Under a conservatorship, the remaining common and preferred shares of Fannie and Freddie would be worth little, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a prepackaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets ...

Read more: http://www.chron.com/disp/story.mpl/business/5986528.html

[mike_c]

34. it's all American socialism for the rich and debt for the rest of us....

This is shameful-- I mean, I'm a socialist when you get right down to it, but this is not right. The astronomically wealthy get a safety net, and the rest of us get to hold it for them.

[frankieT]

36. privatize the profits, socialize the losses ! the winner is Bill Gross (Pimco)

He bought loads of distressed bonds issued by Fannie/Freddie knowing that US govt will have to bail them out.

[mike_c]

37. yup-- bondholders will walk away while stock holders lose everything...

...and the rest of us consign our children to the workhouses. Metaphorically speaking, I hope.

[PBS Poll-435]

35. I vote NO. WTF?

[Runcible Spoon]

38. Fuck Greenspan, fuck Bernanke

so a short term fix is to bail them out to prevent a domino effect. But how long should we be expected to prop up and obviously flailing economic model? Republicans love free market my ass. Let's go motherfuckers, let's see the market take care of this one instead. :mad:

Lending profit incentives need to be SOCIALIZED NOW. In what sane economy is being in debt over 10 times your annual salary acceptable? This current madness is set up to fail. Now bring on the neoliberal apologists, either that or this gets ignored. What the fuck should we care about Palin when this madness happens right under our noses.

[girl gone mad]

42. DId anyone listen to that sociopath Mitt Romney's speech at the RNC?

The only Republican proposing solutions to our current nightmare was demanding LESS REGULATION.

No wonder the rest of them kept it vague. God help us if McCain wins.

[PDJane]

39. Palin is just distraction.........

And this is outrageous. If you're going to bail them out, then they should be a national asset. Just take them over.

[hunter]

66. I agree. They give us a soap opera to watch while they finish looting the house.

How about we throw the crooks doing the looting out onto the street (or in prison...) and figure out a way to keep people in their homes?

Palin is not a realistic choice for V.P. and I'm almost thinking she wasn't meant to be.

[Ghost Dog]

40. Wow.

As predicted, but still, WOW!

"It is not possible to calculate the cost."

The executives and their boards and all the cronies ought to be wiped out too.

[DeSwiss]

41. K&R

[Solly Mack]

43. what happens to those companies that own some of the debt?

A company that purchased/buy out mortgage debt of Fannie/Freddie?

Would they get their money back under this? (from us - taxpayers) The government, using tax dollars, would guarantee payment? I'm not talking shareholders...but another investment/buy out company that bought some of the mortgages.

That is what the article is saying yes?

I know it's saying other things as well...

[barbtries]

44. lose your home? tough shit

but these CEO's cannot be allowed to lose their millions and billions.

jaw dropped at this headline.

[Liberal Dose]

45. We need corporate welfare reform. This is sickening. eom

[Enthusiast]

46. Reregulation. Republican champions of deregulation

are responsible for this. And this should be our mantra! How many times have you heard Republicans say "Too much government regulation." ?

[Ghost Dog]

53. Here, according to NYT, Preferred shareholders also take the hit.

But not so, according to WP and Bloomberg...

Who's got the spin under control, here?

We'll have to wait and see what AP has to say. :sarcasm:

[ozymandius]

47. Free market my arse!

What Barry Ritholtz said:

I suspect this will be another hugely expensive and ultimately unsuccessful attempt to bailout our prior irresponsible profligacy. Ultimately, we pay for this through 1) the massive printing of more dollars; 2) some corresponding form of hyper inflation; and 3) the kindness of not strangers but our overseas overlords.

That's right -- we have no money for rebuilding our infrastructure, for any form of National Heath Care, for fixing/saving social security, but a bunch of rogue traders and Alan Greenspan, under the guise of "Deregulation" can leverage up and lose trillions, which you the taxpayer is on the hook for!

http://bigpicture.typepad.com/comments/2008/09/here-comes-the.html

[Ghost Dog]

55. Reuters, here:

U.S. to take control of Fannie and Freddie: reports
By Glenn Somerville and Al Yoon
Sat Sep 6, 2008 1:03am EDT
http://www.reuters.com/article/topNews/idUSN0527801420080906?sp=true

WASHINGTON/NEW YORK (Reuters) - The U.S. government plans to put government sponsored mortgage finance companies Fannie Mae and Freddie Mac under federal control, the New York Times and Washington Post newspapers reported late Friday, in what could be the largest financial bailout in the nation's history.

...

U.S. Treasury spokeswoman Brookly McLaughlin declined to comment on the Journal report on Friday. Fannie Mae and Freddie Mac spokesmen also declined to comment. The Federal Reserve, which earlier this year gave both companies the right to borrow from its discount window if necessary, declined comment also.

...

The value of the company's common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares, would be protected by the government, the Washington Post said.

Senior Bush administration and Federal Reserve officials called in top executives of Fannie Mae and Freddie Mac on Friday and told them that the government was preparing to place the two companies under federal control, officials and company executives told the New York Times.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson were present at meetings with James Lockhart, the director of the Federal Housing Finance Agency, the regulator of the two companies, and with Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron on Friday, Reuters can confirm. There were separate meetings with the two CEOs.

...

Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts eventually, the Wall Street Journal reported.

Earlier, McLaughlin had told Reuters the department was "making progress on our work" with Morgan Stanley, the Federal Housing Finance Agency, and the U.S. Federal Reserve.

...

Shares of the two government sponsored enterprises (GSEs)have plunged about 80 percent since mid-May this year as the U.S. housing market slump resulted in the two companies reporting about $14 billion in losses in the past four quarters, eroding some of their capital.

"People have priced in an equity infusion that would wipe out shareholders," said Chuck Gabriel, managing director at Washington-based consultants Capital Alpha Partners. "On the other hand, they have come to understand you wouldn't have such an event without the GSEs agreeing to it."

Financial markets have come to expect that an investment by the U.S. Treasury would explicitly back the companies' $1.6 trillion in debt, but leave their shares nearly valueless.

The Wall Street Journal, citing people familiar with the matter, said the plan was expected to involve the creative use of authority the Treasury won from the U.S. Congress to pump capital into the two government-sponsored enterprises if it believed it was necessary.

...

Shares of Fannie Mae and Freddie Mac, which had rebounded since August 21 on speculation a government intervention might be averted, plunged in after-hours trading in New York on Friday.

Fannie Mae stock fell 16.9 percent to $5.85, while Freddie's shares declined 7 percent to $4.74.

Analysts at Citigroup, Merrill Lynch, and Goldman Sachs since mid-August have issued reports saying the companies had plenty of capital to operate for the near term, and both companies have successfully rolled over debt on schedule in the meantime. Yield spread premiums on the companies' senior debt narrowed as traders bet government funding would cut their risks.

However, the major credit rating companies since August 22 all cut their ratings on preferred stock of the two GSEs on expectations that the share price declines had cut access to capital, increasing the need for emergency financial support.

The companies never lost their access to capital markets where they raise money to support the U.S. housing market, but the biggest buyers of the debt have grown more cautious.

Foreign central banks reduced their holdings of "federal agency" debt in custody at the Federal Reserve in the past week for the seventh week in a row.

Russia has continued reducing its holdings of agency debt, Alexei Ulyukayev, first deputy chairman of Russia's central bank, said on Friday.

...

(Additional reporting by Dena Aubin, Kristina Cooke and Julie Haviv in New York, and Dmitry Sergeyev in Sochi, Russia; Editing by Anthony Boadle, Todd Eastham and Clive McKeef)

[lonestarnot]

58. Hey apparently when you do bidness with China, you have to do as they say.

[Odin2005]

62. Ugh, this is "privatize the profits and socializing the losses" in all it's disgusting unglory.

If a private enterprise is "too big to fail" it's too big to be a private enterprise. If it's so big that it can't be allowed to fail it should be nationalized.

[Theres-a]

63. Kick

Not surprised,but damn it's heard to hear.

[TankLV]

64. LET THEM FAIL!!! DON'T LET THE CEO'S POCKET AND KEEP THEIR SALARIES!!!

The "people" will be just fine - they will have their $100,000 savings nice and safe - and that's about $100,000 more than the overwhelming majority of americans have in savings!!!

LET THEM FAIL!!! Don't let the CEO's keep their OUTRAGEOUS salaries!!!

[Blue_Tires]

67. so much for 'personal responsibility'

[harun]

69. Everyone on DU needs to know when you are in a conversation with

knucklehead conservatives and they talk about "personal responsibility" we need to ask them if they believe in Corporate Responsibility?

[harun]

68. If our gov't made a move this big to help the middle class or poor

people the RW'rs would scream "communism". To help the rich, it's simply "federal control".

That taxpayers have now assumed all the risk in the mis-management of these companies. This will only encourage more companies to act irresponsibly.