Feds Take Control of Fannie and Freddie

Washington, DC, Sept. 7, 2008--In the biggest government bailout in U.S. history, the Treasury said  that government regulators are taking control of home mortgage giants Fannie Mae and Freddie Mac.

The two companies will be run by the government indefinitely, with the two current chief executives to be replaced and the government investing up to $100 billion in each firm to keep them solvent.

The government said that stock in the company will continue to trade, although powers of stockholders will be suspended until government control ends.

In order to improve the availability of mortgages, Treasury will start buying Freddie and Fannie's mortgaged-backed debt in the open market. The companies will also end all lobbying of the government and eliminate dividends.

Fannie Mae and Freddie Mac form the cornerstones of the U.S. mortgage market and own or guarantee almost half the home loans in the country's roughly $12 trillion mortgage market. Over the past year, the companies have recorded combined losses of around $14 billion.

The move puts the U.S. government at risk to lose tens of billions of dollars.

To support the plan, Treasury will purchase up to $100 billion in each company to ensure they maintain a positive net worth.

If the FHFA determines that Fannie and Freddie's liabilities have exceeded its assets under accounting rules, the Treasury will contribute cash capital to the firms to make up the difference, receiving senior preferred stock in return.

It will also buy mortgage-backed securities from the firms in the open market, with a lending facility held at the Federal Reserve Bank of New York.

Technically, the government is putting the companies in conservatorship.