Federal officials have informed top executives of Fannie Mae and Freddie Mac that the government is placing the two companies under federal control. The plan places the companies into a conservatorship that operates like a pre-packaged bankruptcy. It is similar to plans used by small businesses to clean up their books and then they can emerge with stronger balance sheets. The executives and their boards are being replaced and shareholders have lost their stock value. The companies will still be allowed to continue with uninterrupted operation because the government is backing their debt. Fannie and Freddie are responsible for nearly 70 percent of new loans. This bailout has the potential to cost taxpayers trillions of dollars. It will clearly be the largest rescue in the nation’s history.
The debt securities Fannie and Freddie issue to finance their operations are owned by mutual funds, pension funds, foreign governments and big companies. The declines in the housing and financial markets forced the administration’s hand. Foreign governments had become increasingly cautious about holding billions of dollars in securities issued by the companies, particularly with no sign that their losses would abate any time soon. This situation combined with the inability of the companies to raise new capital, the administration apparently decided it would be better to act. Fannie and Freddie have about $5 trillion in debt outstanding that is being held by investors including Asian central banks. Payment of this debt is now guaranteed by the federal government. (The New York Times, 9/6/08)