The U.S. government announced yesterday that it was taking control of mortgage giants Fannie Mae and Freddie Mac, saying the companies' weakened finances had made it impossible for them to carry out their missions of supporting the struggling housing market.
At a news conference in Washington, Treasury Secretary Henry M. Paulson Jr. laid out a plan to place the companies into conservatorship, under which the government will direct their operations from now on. The Treasury will make capital injections into the companies, up to $100 billion each over time, and lend them money as needed.
In a bid to bring down mortgage rates, the Treasury also will step in to buy some of the mortgage-backed bonds of the companies in the marketplace - in effect, taking home loans onto its own books.
Current investors in the companies won't have their shares canceled, but the value of the stocks could easily be wiped out, depending on how much taxpayer money it takes to stabilize the companies.
"I have long said that the housing correction poses the biggest risk to our economy," Paulson said. "It is a drag on our economic growth and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing."
President Bush backed Paulson in a statement issued by the White House:
"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."
The decision to take over the companies is the latest move by the government in its year-old struggle to respond to what many say is the worst financial crisis since the Great Depression.
Plummeting home prices and soaring mortgage defaults have ravaged the finances of Fannie Mae and Freddie Mac, which were created by the government decades ago to support the housing and mortgage markets by buying home loans from banks and thrifts.
Although they were chartered by the government, the companies are owned by investors, making for a strange hybrid that critics have long warned was fraught with peril.
Unfettered for years as they sought to boost earnings for their shareholders, the companies ballooned in size. Between them, Fannie Mae and Freddie Mac own or guarantee $5.4 trillion of U.S. home mortgages, about half the total outstanding.
