Treasury Secretary Henry Paulson announced on Sunday that the government will take charge of the Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), commonly know as Freddie Mac. The two government-sponsored enterprises (GSEs) are responsible for buying or backing about half of all U.S. mortgages, and are vital to the housing market.
Referring to the Treasury’s earlier plans, in July, to lend additional funds to the GSEs, Paulson said, “Since that time, we have closely monitored financial market and business conditions, and have analyzed in great detail, the current financial conditions of the GSEs, including the ability of the GSEs to weather a variety of market conditions, going forward. As a result of this work, we have determined that it is necessary to take action.
“Since this difficult period for the GSEs began, I have clearly stated three critical objectives; providing stability to the financial markets, supporting the availability of mortgage finance, and protecting the taxpayers, both by minimizing the near-term cost to the taxpayer, and by setting policy-makers on a course to resolve the systemic risk, created by the inherent conflict in the GSE structure.
“Based on what we’ve learned about these institutions over the last four weeks, including what we’ve learned about their capital requirements, and given the conditions of the financial markets today, I concluded that it would not have been in the best interest of the taxpayers, for the Treasury to simply make an equity investment in these enterprises in their current form.”
Paulson stated that the GSEs would be put into conservatorship, run by the newly-formed Federal Housing Finance Agency (FHFA).
FHFA Director James B. Lockhart announced the actions the FHFA would be taking:
“There are several key components of this conservatorship:
“First, Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS, senior debt and subordinated debt.
“Second, the Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.
“Third, as the conservator, FHFA will assume the power of the Board and management.
“Fourth, the present CEOs will be leaving, but we have asked them to stay on to help with the transition.
“Fifth, I am announcing today I have selected Herb Allison to be the new CEO of Fannie Mae and David Moffett the CEO of Freddie Mac. Herb has been the Vice Chairman of Merrill Lynch and for the last eight years chairman of TIAA-CREF. David was the Vice Chairman and CFO of US Bancorp. I appreciate the willingness of these two men to take on these tough jobs during these challenging times. Their compensation will be significantly lower than the outgoing CEOs. They will be joined by equally strong non-executive chairmen.
“Sixth, at this time any other management action will be very limited. In fact, the new CEOs have agreed with me that it is very important to work with the current management teams and employees to encourage them to stay and to continue to make important improvements to the Enterprises.
“Seventh, in order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.
“Eighth, all political activities — including all lobbying — will be halted immediately. We will review the charitable activities.
“Lastly and very importantly, there will be the financing and investing relationship with the U.S. Treasury, which Secretary Paulson will be discussing. We believe that these facilities will provide the critically needed support to Freddie Mac and Fannie Mae and importantly the liquidity of the mortgage market.”
Sources:
U.S. Treasury Department
