Freddie Mac and Fannie Mae Government Takeover

Posted on September 10th, 2008 by saman

The government of the United States is going to put Freddie Mac and Fannie Mae under federal control very soon. This would be the largest bailout by the government in the history of the nation.

The United States Treasury is getting close to finalizing plans to change the structure of the two companies in this foreclosure crisis. The structural changes will include changes to the upper management. Freddie Mac and Fannie Mae would be put under a conservatorship.

The stock of the company would be diluted and the debt of the company and certain shares would be under the protection of the company.

Recently, members of the Bush administration had a meeting with executives of Freddie Mac and Fannie Mae and informed them that the government would be putting the companies under federal control.

The executives of the two companies were informed that the shareholders value would be diluted but the companies would continue to function as normal and the governments would back their debt.

Daniel H. Mudd and Richard Syron, the CEOs of Fannie Mae and Freddie Mac respectively will be expected to step down from their positions at some point

The U.S. Department of Treasury hired Morgan Stanley in August to give advice on whether or not there was sufficient capital in the company and to help figure out how they should work with the two companies.

In late July, an emergency plan was approved that gave the U.S. Treasury the ability to offer an undisclosed amount of credit to Fannie Mae and Freddie Mac. The measure was signed into law by the President and it requires that the two companies agree to being backed by the Treasury.

The two mortgage companies will not get a huge infusion of capital right away but the government will place money into the two companies quarterly depending on the losses of the company. This way, the cost of the rescue would be minimized.

Fannie Mae and Freddie Mac shares have rebounded in August because of the possibility that a government takeover might be avoided. The stock of Fannie Mae was dropped about sixteen percent to $5.85 per share and the stock of Freddie Mac dropped seven percent to $4.74 per share.

Financial Analyst at Goldman Sachs, Citigroup, Merrill Lynch have presented reports stating that the two companies have enough money to continue to operator for now and the two companies have rolled over debt successfully and on schedule.

Fannie Mae and Freddie Mac have not lost their access to markets of capital where they can raise money to help the housing market in the United States but the biggest companies that buy debt have become more cautious.

Fannie Mae was created as an agency of the government in 1938 during the Great Depression. It was created to purchase mortgages insured by the government from lenders. This provided them with money to make additional loans.

During the forties and fifties, Fannie Mae continued to perform as an agency run by the government even as the industry became privatized.