WASHINGTON (AFP) — The US government took over ailing mortgage giants Fannie Mae and Freddie Mac on Sunday and placed them in a "conservatorship" in a bid to avert a financial system meltdown from the housing crisis.
Treasury Secretary Henry Paulson announced the US regulator was seizing control of the government-chartered, shareholder-owned firms which underpin trillions of dollars of home loans and a have an enormous global financial footprint.
The move constitutes a massive government intervention to contain the damage from the worst housing slump in decades, which has rippled through the banking system and led to multibillion-dollar losses for Fannie and Freddie.
"Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction, and are critical to returning the economy to stronger sustained growth in the future," President George W. Bush said in a statement.
He stressed that the move was a temporary, "near term" intervention, but said a financial system meltdown from the potential failure of Freddie Mac and Fannie Mae posed "an unacceptable risk" to the US economy.
Paulson said the plan "is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition" of the two government-sponsored enterprises, or GSEs, which provide liquidity for housing by selling bonds and using the proceeds to buy mortgages from lenders.
New chief executives have been installed as part of the action that Paulson said was needed in view of "the inherent conflict and flawed business model" embedded in the structures of the two companies.
Departing CEOs Dan Mudd of Fannie Mae and Dick Syron of Freddie Mac "have agreed to stay on for a period to help with the transition," Paulson said.
Herb Allison, former chairman of the retirement fund TIAA-CREF and a former Merrill Lynch executive, will be the new CEO of Fannie Mae and David Moffett, vice chairman at US Bancorp, will head Freddie Mac.
"Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS (mortgage-backed securities), senior debt and subordinated debt," said Federal Housing Finance Agency director James Lockhart.
Federal Reserve chairman Ben Bernanke, who took part in several days of frantic talks to come up with the rescue plan, lauded the effort.
"These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," Bernanke said in a statement.
The announcement came ahead of the opening of financial markets in Asia and amid ongoing turmoil in markets in response to the housing and finance crisis.
One key element in the plan provides the US government with one billion dollars in a new class of preferred shares.
The Treasury "received from each GSE an immediate issuance of one billion dollars in preferred senior stock at no cost to the US government," a Treasury official said.
"This is not a Treasury injection of capital -- it's the GSEs issuing the stock to Treasury and is a taxpayer protection."
The Treasury may invest up to 100 billion dollars in each company if new capital is needed, according to the plan.
The new plan does not eliminate the existing common and preferred shares but means they would absorb any losses ahead of the government, Paulson said.
Another step -- authorized by emergency legislation passed by Congress in July -- opens up a new, unspecified, Treasury line of credit to the two firms through the Federal Reserve.
"This facility is intended to serve as an ultimate liquidity backstop," and will be available through December 2009, Paulson said.
Paulson also said Treasury "is initiating a temporary program" to purchase mortgage-backed securities of Fannie and Freddie, to help provide liquidity in a financial market strained by a credit crunch.
"Treasury will begin this new program later this month ... Additional purchases will be made as deemed appropriate," Paulson said, adding that "there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains."
The scale of the program "will be based on developments in the capital markets and housing markets," according to a Treasury fact sheet.
Under the plan, Fannie and Freddie will "modestly" increase their portfolios of debt through the end of 2009. Then, these will be reduced at the rate of 10 percent a year in an effort to limit "system risk" to the financial system, according to Paulson.
While the US government is essentially taking on more than five trillion dollars in potential liabilities, Standard & Poor's said the top credit rating of the government would not be affected.
"The US government's credit quality continues to be upheld by its high-income, highly diversified, and exceptionally flexible economy," S&P said.
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