Just in case the abysmal labor numbers released on Friday didn't scare the crap out of you, Treasury Secretary Hank Paulson announced the U.S. government would be nationalizing troubled mortgage houses Fannie Mae and Freddie Mac. Shareholders in the two mortgage giants will lose all their investment, and the resultant cost to American taxpayers will total tens of billions of dollars.
The
plan will also see the Treasury buy mortgage-backed securities from
banks in the open market, and will provide a lending facility from the
Treasury through funds held at the Federal Reserve Bank of New York.
"Through
the four actions we have taken today, FHFA (Federal Housing Finance
Agency) and Treasury have acted on the responsibilities we have to
protect the stability of the financial markets, including the mortgage
market, and to protect the taxpayer to the maximum extent possible,"
Mr. Paulson said at a press conference.
He admitted that he did
not know the final cost to the taxpayer, saying: "In the end, the
ultimate cost to the taxpayer will depend on the business results of
the GSEs going forward." (Link)
Secretary Paulson announced the FHFA, the new regulator, would manage the companies in a conservatorship and replace the executives at each. The new executives, identified by Paulson, are Herbert M. Allison, currently chairman of TIAA-CREF, the huge pension fund for teachers, who will take over Fannie Mae and replace the chief executive, Daniel Mudd. David M. Moffett, currently a senior adviser at the Carlyle Group, one of the country’s biggest private equity firms, will replace Richard Syron as chief executive of Freddie Mac.
The bailout includes a plan to minimize future risks. The Treasury plan requires both Fannie Mae and Freddie Mac to shrink their portfolios 10% per year until they reach $250B each (they each hold approximately $700B each today).
According to the NY Times, the government will also set up a "Secured Lending Credit Facility", a fallback means to borrow money if unable to secure enough money on the open market to manage their business. Then there's this:
In a possibly unprecedented move into ther private markets, the Treasury Department will also buy up billions of dollars in Fannie and Freddie mortgage securities on the open market. This move is likely to make it much easier for the companies to finance somewhat riskier loans.
Isn't that how we got into this mess to begin with?
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