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US gov't takes over Fannie, Freddie to stabilize financial market
8/9/2008 9:43

The US government said yesterday that it will take over two mortgage giants Fannie Mae and Freddie Mac in order to stabilize the financial market.

Treasury Secretary Henry Paulson said it was "necessary" for the Bush government to take actions because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

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, Paulson said in a statement.

"Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking," Paulson stated.

The plan will enable the Treasury to purchase mortgage-backed securities from the two firms in the open market.

The two firms had nearly 36 billion dollars in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.

"Under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares," Paulson said.

The Federal Housing Finance Agency (FHFA), which regulates the two government-sponsored enterprises, will act as conservator of the two firms, taking control of the companies' day-to-day operations.

The takeover also includes the departure of Fannie Chief Executive Daniel Mudd and Freddie Chairman and Chief Executive Richard Syron.

Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.

Fannie Mae and Freddie Mac own or guarantee more than 5 trillion dollars of US home loans, about half the total outstanding loans in the country.

The stocks of the two companies have fallen more than 90 percent in the past year and in recent months foreign investors have pared their holdings of the companies' securities.

Fed Chairman Ben Bernanke hailed the move. "These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," Bernanke said in a statement.

"I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty," he added.