Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say
By David S. Hilzenrath, Neil Irwin, and Zachary A.Goldfarb
Washington Post Staff Writers
THE GOVERNMENT HAS formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives, and use government funds to prop them up, government officials told the two companies yesterday, according to sources familiar with the conversations.
Under the plan, the federal government would place the firms in a legal state known as conservatorship, the sources said. 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.
Instead of giving each company a big capital infusion up front, the government plans to make quarterly infusions as the companies' losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.
As the pace of discussions accelerated today, Treasury officials contacted senior congressional leaders, telling them they might be briefed on the plan this weekend and asking for telephone numbers at which they could be reached.
Fannie Mae and Freddie Mac have backed 70 percent of new mortgages in recent months, but have incurred vast losses on their loan portfolios as the housing market has tanked. Treasury Secretary Henry M. Paulson Jr., the architect of the plan, and other government leaders have said the companies remain vital to preventing an even broader financial crisis and economic downturn.
The chief executives of the two companies were called into afternoon meetings today at the 17th Street NW offices of the Federal Housing Finance Administration, their direct regulator, according to sources familiar with the events.
Executives of the two companies were told to show up without being told of an agenda. Daniel Mudd, chief executive of Fannie Mae, was accompanied by outside lawyers. He showed up at around 3 p.m. for a two hour meeting. Richard Syron, chief executive of Freddie Mac, started his meeting at around 5 p.m., accompanied by several members of the Freddie Mac board.
Paulson, Federal Reserve Chairman Ben S. Bernanke, James Lockhart, the director of the housing finance regulator told the executives of the plan, which would strip them of their jobs.