US Treasury Seizes Freddie Mac and Fannie Mac

The US Treasury Department has taken control of Fannie Mae and Freddie Mac, the troubled mortgage companies seen as having an implicit government guarantee. A four-part rescue plan includes an explicit open-ended guarantee from insolvency from the Treasury by providing as much capital as they need. The Treasury have refused to put a figure on how much is required. Tens of billions of dollars in the first year can be expected though.

Both chief executives, Daniel Mudd and Richard Syron have been removed by Treasury Secretary Henry M. Paulson, and replaced. Fannie Mae will led by Herbert M. Allison, chairman of TIAA-CREF, a teachers pension fund. Freddie Mac, has David M. Moffett, a senior advisor at Carlyle Group take the helm.

“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,” Mr. Paulson said. “This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.”

Part one of the plan is a pledge to provide extra cash by buying up a new series of preferred shares that would offer dividends and be senior to both both the existing preferred shares and the common stock that investors around the world already hold. They companies can "modestly increase" the size of their existing investment portfolios until late 2009. Thereafter portfolios must shrink by 10% each year until they each total $250bn. Currently they hold $700bn each.

The Treasury Department will also buy up billions of dollars in Fannie and Freddie mortgage securities on the open market.