Fannie, Freddie takeover possible

Times Staff Writer

Treasury Secretary Henry M. Paulson Jr. called in top executives of Fannie Mae and Freddie Mac late Friday to hammer out details of a rescue plan for the troubled mortgage giants that could go so far as a full government takeover, according to people familiar with the effort.

Paulson, together with Federal Reserve Chairman Ben S. Bernanke, was expected to meet through the weekend with Fannie Mae Chief Executive Daniel Mudd, Freddie Mac CEO Richard Syron and federal regulators to unveil a plan by the time Asian financial markets open Monday morning.

Among the key issues: whether the two executives and perhaps their boards of directors would step aside in return for federal aid.

Doubts about the stability of Fannie and Freddie, which own or guarantee more than $5 trillion worth of mortgages -- about half of all U.S. home loans -- have dogged investors since the U.S. housing finance market began to unravel a year ago.


The government-chartered but shareholder-owned companies play such a central role in the U.S. financial system that any new worries about their functioning could send damaging ripples around the world and worsen the downward spiral of house prices and foreclosures here at home.

Treasury action could potentially help home buyers and sellers by keeping mortgage interest rates lower than they might be if the firms were to run out of capital and stop buying and guaranteeing mortgages.

Paulson sought to allay such fears in July by winning congressional authority to lend the firms taxpayer money, buy their stock or even force them into conservatorship, a sort of bankruptcy.

The Treasury secretary and other top officials hoped that attaining that authority would in itself be enough to steady the companies and that Washington would not be forced to use its new powers.

Any sort of Treasury intervention aimed at Fannie and Freddie would represent a huge expansion of the safety net that a deeply reluctant Bush administration has slipped under the financial system since the beginning of the crisis.

Fannie and Freddie’s nose dive marks a spectacular fall from grace for two of Washington’s most powerful institutions. Not only were the pair financial behemoths, but they were also among the capital’s most aggressive lobbyists, convincing lawmakers and other officials that they were essential to the American dream of homeownership.

The options open to the government at this stage include making loans to the firms, buying stock or pushing them into conservatorship and effectively taking over their operations.

Policy analysts knowledgeable about the firms generally favor the takeover approach, saying that such a step would reassure financial markets that the firms are stable and would give the Treasury Department the power to eventually reorganize Fannie and Freddie’s operations.


But such a move would almost certainly leave the companies’ current investors with nothing, a move that some warn would sow doubts among stockholders in more conventional financial firms such as investment bank Lehman Bros.

And it would represent an about-face by Paulson, who as recently as last month was still saying he did not expect to use his new authority and supported the firms’ remaining in their current form.

On the other hand, if the Treasury Department were simply to pump additional money into the companies, analysts said there would be no way to guarantee that financial market players wouldn’t dump the stock anyway, leaving Fannie and Freddie still in danger.

That’s a position that the government has been in repeatedly since the current crisis began, and to date it has yet to be able to revive the financial system and keep it stable. It was not clear Friday precisely what was causing Paulson and the administration to act now.


Between them, the companies have suffered about $14 billion in losses during the last year. But they appeared to be able to continue borrowing in world markets, crucial for their ability to continue to operate.

Paulson and the administration came in for heavy criticism for seeking financial backup authority. Critics charged that the administration was, in a widely used phrase, “socializing the companies’ losses and privatizing their gains.”

That’s because the chief beneficiaries of the new authority appeared to be the companies’ investors, who saw the steep decline in the price of their shares level off with Washington effectively promising to assume risks of loss they had previously borne.

At least in part, the meetings Friday were aimed at winning the approval of Mudd and Syron, Fannie and Freddie’s chief executives, for the government bailout plan.


Under the July legislation, the two must OK any government intervention unless the firms’ new regulator, the Federal Housing Finance Agency, effectively declares the companies insolvent.

People familiar with the session said the two executives were told that federal aid may well be contingent on their stepping aside and being replaced with managers acceptable to the government.

Step by step, Washington has become ever more involved in trying to stabilize the nation’s banking system and financial markets only to find that still more action is required.