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U.S. seizes Fannie, Freddie, aims to calm markets

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  • U.S. seizes Fannie, Freddie, aims to calm markets

    U.S. seizes Fannie, Freddie, aims to calm markets

    WASHINGTON (Reuters) - The U.S. government on Sunday seized control of mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N), launching what could be its biggest bailout ever in a bid to support the U.S. housing market and ward off more global financial market turbulence.

    The action, prompted by worries over the companies' shrinking capital, was the latest in a series of emergency steps taken by U.S. officials to prop up the ailing housing market and quell what is now a year-long crisis in credit markets that has helped push many economies toward recession.

    "Our economy and our markets will not recover until the bulk of this housing correction is behind us," U.S. Treasury Secretary Henry Paulson said in a statement read to reporters.

    Fannie Mae and Freddie Mac, which own or guarantee almost half of the country's $12 trillion in outstanding home mortgage debt, were so large that "a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Paulson said.

    The congressionally chartered companies, the two largest sources of U.S. housing finance, have suffered combined losses of nearly $14 billion in the last four quarters and large holders of their debt, including overseas central banks, have shown increasing nervousness over their health.

    U.S. stock index futures surged on Sunday evening, pointing to a sharp rise when Wall Street opens on Monday, showing the plan had shored up investor sentiment.

    U.S. bond futures, however, tumbled as it raised concerns about additional debt the government might take on.

    U.S. Treasuries prices fell sharply as the new trading week opened in Asia with benchmark 10-year yields rising to 3.900 percent, up 19 basis points from Friday.

    The U.S. dollar rose against the yen but slid against the euro.

    The two government-sponsored enterprises, which are publicly traded but which serve a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in line in any claims.

    The normal powers of the companies' directors and officers will be held by the conservator, their regulator, the Federal Housing Finance Agency, until the businesses are restored to "safe and solvent" financial health.

    U.S. President George W. Bush said the action was necessary because the troubles at Fannie Mae and Freddie Mac, which have $1.6 trillion in debt outstanding, posed "an unacceptable risk to the broader financial system and our economy."

    However, U.S. Senate Banking Committee Chairman Christopher Dodd said he planned to hold hearings to examine the government's decision, saying many questions were unanswered.

    GOVERNMENT BECOMES SHAREHOLDER

    As part of the plan, the Treasury is taking an equity stake in the companies, will purchase mortgage-backed securities they issue and will extend a credit line to them.

    In addition, the top executives were ousted. Freddie Mac chief executive Richard Syron and Fannie Mae's CEO Daniel Mudd were replaced by David Moffett, a former top official at US Bancorp (USB.N) and Herb Allison, a former top official at both Merrill Lynch (MER.N) and pension fund TIAA-CREF.

    The Treasury took $1 billion of preferred senior stock in each company but its equity stake could grow to as large as $100 billion in each and will be senior to both existing preferred and common shares. The Treasury will also receive warrants to buy up to 79.9 percent of the common stock.

    The Treasury this month will begin buying mortgage-backed securities issued by the companies. The credit line, which will also serve the 12 federal home loan banks, will be in place through the end of next year.

    The actions reflect a growing willingness by the devoutly free-enterprise Bush administration to involve the government in business to help an economy mired in a housing and credit crisis. The plan should help instill some confidence in shaky credit markets and lower mortgage costs, analysts said.

    "By preserving the GSEs in current form -- at least for now -- and injecting sizable billions of dollars into the mortgage market, mortgage rates should come down, and the housing market will be healthier for it," Bill Gross, manager of Pimco, the world's largest bond fund, told Reuters.

    TAXPAYERS ON THE HOOK

    The Treasury Department said the ultimate cost of the plan depends on how well the companies perform. In July, congressional budget analysts estimated a rescue would likely cost taxpayers $25 billion.

    The proposals outlined on Sunday, less than two months away from the U.S. election, leave the ultimate fate of Fannie Mae and Freddie Mac in the hands of the next president.

    Democratic presidential contender Sen. Barack Obama said it will be necessary to clarify whether they are truly public companies, subject to market discipline, or special entities that investors feel they can put money in risk-free.

    A senior adviser to Republican presidential nominee Sen. John McCain described them as examples of "crony capitalism" and said McCain believes they should eventually be privatized.

    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.

    Paulson said information on the companies' capital gained over the past four weeks led him to conclude officials needed to act. The Treasury hired Morgan Stanley (MS.N) on August 5 to advise on whether the companies were adequately capitalized.

    FHFA Director James Lockhart said the companies lacked sufficient capital to support the housing market at a time they were suffering big losses.

    "As house prices, earnings and capital have continued to deteriorate, their ability to fulfill their mission has deteriorated," he said. "They have been unable to provide needed stability to the market."

    Ben Bernanke, Chairman of the Fed -- the U.S. central bank -- strongly endorsed the action. "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," he said.
    Dude. Can. Fly.

  • #2
    seizes fanny...

    is that like playing grab ass?

    Comment


    • #3
      Interesting...you don't hear Republicans crying foul about government getting itself too involved in the economy here.
      On my mind: How can I shut up the singing English graduate student? How many more lossess will KU's basketball team have than its football team? How will the Rams front office screw up this year?


      Official lounge sponsor of Will Witherspoon, Russell Robinson, and all other things Jayhawk at the lounge (which ain't much).

      Comment


      • #4
        Originally posted by chiguy View Post
        Interesting...you don't hear Republicans crying foul about government getting itself too involved in the economy here.
        And to top that - the auto manufacturers want the Gov't to bail them out.

        What happened to the concept of "letting the markets work itself out" ?

        Comment


        • #5
          Great way to reward incompetence:

          Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be “without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.



          Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.

          Comment


          • #6
            Originally posted by hansolo View Post
            And to top that - the auto manufacturers want the Gov't to bail them out.

            What happened to the concept of "letting the markets work itself out" ?

            That only applies to poor, usually black, people.
            On my mind: How can I shut up the singing English graduate student? How many more lossess will KU's basketball team have than its football team? How will the Rams front office screw up this year?


            Official lounge sponsor of Will Witherspoon, Russell Robinson, and all other things Jayhawk at the lounge (which ain't much).

            Comment


            • #7
              Originally posted by hansolo View Post
              Great way to reward incompetence:

              No kidding. Why aren't they being prosecuted?

              Comment


              • #8
                Originally posted by hansolo View Post
                Great way to reward incompetence:
                For companies as big as they are, it's really not out of line. That's just the going rate (RIGHTLY or WRONGLY).

                Comment


                • #9
                  Originally posted by backstop View Post
                  For companies as big as they are, it's really not out of line. That's just the going rate (RIGHTLY or WRONGLY).
                  And its stupid. I understand reaping nice bonuses if a business succeeds. I have no problem with that.

                  But incompetence ? This is fucking stupid.

                  To top it - the taxpayers pay for all of this.

                  Comment


                  • #10
                    Originally posted by hansolo View Post
                    And its stupid. I understand reaping nice bonuses if a business succeeds. I have no problem with that.

                    But incompetence ? This is fucking stupid.

                    To top it - the taxpayers pay for all of this.

                    The options and stuff are built in when they sign on. I'm not saying it's not stupid...just sort of what you have to do to get the CEO you want these days. It's like the FA starting pitching market.

                    Comment


                    • #11
                      Originally posted by backstop View Post
                      The options and stuff are built in when they sign on. I'm not saying it's not stupid...just sort of what you have to do to get the CEO you want these days. It's like the FA starting pitching market.
                      Again I know and I understand you.

                      But I say it is wrong and stupid.

                      Comment


                      • #12
                        Originally posted by hansolo View Post
                        Again I know and I understand you.

                        But I say it is wrong and stupid.

                        Are you sure we shouldn't argue about it anyway?

                        Comment


                        • #13
                          Originally posted by backstop View Post
                          Are you sure we shouldn't argue about it anyway?
                          Fuck yeah lets do it. Let's go for a 5 pager.

                          Comment


                          • #14
                            CEOs deserve MORE pay! Every penny! A good one can easily add millions of dollars to a company's value, and thus return great value to shareholders! Also, hansolo smells bad and lives in Canada!

                            Comment


                            • #15
                              Free hand and all that.

                              Except savings and loan industry, banking industry, auto industry, and mortgage industry.
                              From this day forward, I no longer shall tinker with the machinery of death.

                              For more than 20 years I have endeavored-indeed, I have struggled-along with a majority of this Court, to develop procedural & substantive rules that would lend more than the mere appearance of fairness to the death penalty endeavor.


                              I feel morally and intellectually obligated simply to concede that the death penalty experiment has failed.

                              The path the Court has chosen lessens us all. I dissent.

                              Comment

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