http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html
Fannie Mae, Freddie Mac to be Put Under Federal Control, Sources Say
By David S. Hilzenrath, Neil Irwin, and Zachary A.Goldfarb
Washington Post Staff Writers
Friday, September 5, 2008; 8:33 PM
The government has formulated a plan to put troubled mortgage giants
Fannie Mae and Freddie Mac under federal control, dismiss their top
executives, and use government funds to prop them up, government
officials told the two companies yesterday, according to sources
familiar with the conversations.
Under the plan, the federal government would place the firms in a
legal state known as conservatorship, the sources said. The value of
the company's common stock would be diluted but not wiped out while
the holdings of other securities, including company debt and
preferred shares, would be protected by the government.
Instead of giving each company a big capital infusion up front, the
government plans to make quarterly infusions as the companies' losses
warrant, the sources said. This would be an attempt to minimize the
initial cost of the rescue.
As the pace of discussions accelerated today, Treasury officials
contacted senior congressional leaders, telling them they might be
briefed on the plan this weekend and asking for telephone numbers at
which they could be reached.
Fannie Mae and Freddie Mac have backed 70 percent of new mortgages in
recent months, but have incurred vast losses on their loan portfolios
as the housing market has tanked. Treasury Secretary Henry M. Paulson
Jr., the architect of the plan, and other government leaders have
said the companies remain vital to preventing an even broader
financial crisis and economic downturn.
The chief executives of the two companies were called into afternoon
meetings today at the 17th Street NW offices of the Federal Housing
Finance Administration, their direct regulator, according to sources
familiar with the events.
Executives of the two companies were told to show up without being
told of an agenda. Daniel Mudd, chief executive of Fannie Mae, was
accompanied by outside lawyers. He showed up at around 3 p.m. for a
two hour meeting. Richard Syron, chief executive of Freddie Mac,
started his meeting at around 5 p.m., accompanied by several members
of the Freddie Mac board.
Paulson, Federal Reserve Chairman Ben S. Bernanke, James Lockhart,
the director of the housing finance regulator told the executives of
the plan, which would strip them of their jobs.
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