08/09/2008
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US govt to adopt Fannie, Freddie; stakeholders see pain, problems
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WASHINGTON: The US government plans to takeover Fannie Mae and Freddie Mac and all shareholders of the two mortgage giants will take a hit, an influential lawmaker said on Saturday.
The move to take control of the two companies, could amount to the largest financial bailout in the nation's history, and is a bid to ward off further damage to the US housing market which is in its deepest downturn since the Great Depression.
The source said the letter suggested the companies, which own or guarantee almost half of the country's $12 trillion in outstanding home mortgage debt, should agree to the arrangement in order to avoid the more onerous step of being placed in a receivership in the interests of debtholders.
Paulson, Federal Reserve Chairman Ben Bernanke, and the director of the companies' regulator, James Lockhart, met with the chief executives of the two companies on Friday to detail the plan.
The US Treasury, the Federal Reserve and Freddie Mac declined to comment. Fannie Mae did not return calls seeking comment.
The planned intervention reflects concerns among US officials that financial markets had begun to lose confidence in the companies, after they suffered combined losses of nearly $14 billion in the last four quarters.
The stocks of the two companies have fallen more than 90 per cent in the past year and in recent months foreign investors have pared their holdings of the companies' securities.
Financial markets have come to expect that an investment by the US Treasury would explicitly back the companies' $1.6 trillion in debt, but leave their shares nearly valueless.
The Washington Post reported on Saturday that 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.
Separately, the New York Times said the executives and their boards would be replaced and shareholder value diluted, but the companies would be able to continue functioning with the government generally standing behind their debt.
Analysts at Citigroup, Merrill Lynch, and Goldman Sachs have issued reports since mid-August saying the companies had plenty of capital to operate for the near term, and both have successfully rolled over debt in the meantime.
However, since Aug.22, all the major credit rating agencies have cut their ratings on the companies' preferred stock on expectations that the share price declines had cut access to capital, increasing the need for emergency financial support. -Reuters
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