Takeover looms for mortgage giants

By Gretchen Morgenson and Charles Huhigg
New York Times News Service
Published: Sunday, Sept. 7, 2008 12:20 a.m. MDT
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The government's planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as today, came together hurriedly after advisers poring over the companies' books for the Treasury Department concluded that Freddie's accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies' debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.

The details of the deal have not fully emerged, but it appears that investors who own the companies' common stock will be virtually wiped out; preferred shareholders, who have priority over other shareholders, may also end up with little. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.

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While it is not yet possible to calculate the cost of the government's intervention, it could rise into tens of billions of dollars and will probably be among the most expensive rescues ever financed by taxpayers. The takeover comes on the heels of a rescue of the investment bank Bear Stearns, which was sold to JPMorgan Chase in a deal backed by taxpayer dollars. Already, the housing crisis has cost investors and consumers hundreds of billions of dollars.

Both presidential nominees expressed support for the government's plans to take over the companies as necessary. Sen. Barack Obama, D-Ill., said as he campaigned in Indiana that not acting could place the housing market in further distress. "These entities are so big and they are so tied into the housing market that it is probably true that we have to take steps to make sure they don't just collapse," Obama told an audience in Terre Haute on Saturday. But he added that the government needed to take steps to guard against Fannie Mae and Freddie Mac ultimately profiting from the government assistance.

Sen. John McCain, R-Ariz., has long been critical of the mortgage finance giants. His running mate, Gov. Sarah Palin, spoke out from a rally in Colorado Springs. "Fannie Mae and Freddie Mac, they've gotten too big and too expensive to the taxpayers," Palin said. "The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

The big question now is whether the federal government's move to take over Fannie and Freddie will restore investor confidence in the nation's credit markets, help stabilize the stock market and keep loans flowing to creditworthy borrowers.

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