Reports: Bush administration in weekend bailout of Fannie and Freddie

Breaking: The Bush administration is finalizing plans for a takeover, perhaps as soon as this weekend, of Fannie Mae and Freddie Mac. The administration's plan will rescue the companies but virtually wipe out shareholders, according to reports Friday night.

Wall Street Journal:

The Treasury Department is putting the finishing touches to a plan designed to shore up Fannie Mae and Freddie Mac, according to people familiar with the matter, a move that would essentially result in a government takeover of the mortgage giants.

...  the government would take the reins of the companies, at least temporarily. It is also expected to involve the government injecting capital into Fannie and Freddie.

New York Times:

Senior officials from the Bush administration and the Federal Reserve on Friday called in  top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

The Los Angeles Times:

Treasury Secretary Henry M. Paulson Jr. (pictured) called in top executives of Fannie Mae and Freddie Mac late Friday to hammer out details of a rescue plan for the troubled mortgage giants that could go so far as a full government takeover, according to people familiar with the effort.

The New York Times reports the announcement of the government takeover could come as soon as Sunday, prior to the opening of Asian stock markets.

Analysis/bloviation: Five weeks ago, when the Bush administration persuaded Congress to give it the authority to bail out Fannie and Freddie, Treasury Secretary Henry M. Paulson Jr. argued that giving the administration virtually unlimited authority to save the companies would reassure markets, and thus make it unlikely that the administration would actually need to use its new powers. It appears Paulson was either mistaken or less than candid. In either case, it is clear that the credit crunch continues to deepen. The usual question to ask in a situation like this is: Will this work? I think the better question to ask is: Who's next?

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.

Photo Credit: Bloomberg News

Comments

[Don Blotsky]

You need to listen to this guy.

https://www.chrismartenson.com/

This whole country will collaspe.

[E]

Get ready for the next bout of inflation. Can't really see how it won't happen.

I think that it would be interesting to do a post asking the commenters here to think outside of the box and figure out how the collective world governments could even possibly pull us out of this.

And I'm talking Waaaaaaay outside the box.

Unconventional times call for unconventional thinking.

[Paul]

What BS! This amounts to nothing more than the US taxpayer bailing out a (private co.)for the benefit of foreign governments who purchased the shares with the implied guarantee(lie) by Wall Street(swindlers) that the US government would back them.
When will this end? Welcome to the fascist states of America!
(Government control of all business)

[mbob]

uh, guess I'm a little late to the party noting this event.

I smell big trouble. But then again, I've smelt it for a long time now.

Charlie Minter over at the Comstock site once again excoriates accounting practices that allow corp's (maybe they are corpses) to dump all their financial offal into the "non recurring" charges or expenses category when everyone not confined in canvas restraints knows that the expenses recur over and over and over again. Seems that the S&P may not be selling at anything resembling the price it is alleged to occupy.

Net/net? Between crony deals, evaporating credit, layoffs, yadyada, we're looking at a Katrina, not Gustav.

[Venkat]

This is great for the economy.. but how can they forget the common shareholders who are part of the economy??. This hurts because as a whole they are interested in saving companies rather than ordinary people who believed in the companies and invested in their stock..

[Taste & Power]

I'm scared.

[Rational Renter]

Perhaps the federal government's role in the future should be PREVENTING THESE "TOO BIG TO FAIL" BEHEMOTHS FROM FORMING IN THE FIRST PLACE. Deregulation and globalization have turned into the greatest pitfalls in the modern history of the American economy. And it's not all the Republicans fault either. Bill Clinton was a major force in that movement.

[iH8uAll]

We're now in the 2nd ring of the circus...I guess this will top out how much make-up and cleavage Palin will have to show once Obama's polls start to jump through the roof after it is realized that OUR TAX DOLLARS are now bailing out Jumbo-Mortgages of the wealthy. Hurray for the American Govment! Keep us stupid, keep us poor, keep us sick and 'fool' us some more! Goooo Bush and Pelosi!

[Laker]

Will it work?
Most likely not. Most government solutions do not work and only cause more damage.

\Who's next?
Some major large size banks like WAMU, Wachovia, Citi, etc.

[formerlahomeowner]

Peter,

"Paulson was either mistaken or less than candid." LOL. You are a comedian Peter. Paulson's comments were like a debt-ridden consumer who applied for a credit card and told the issuer, "I don't really need it and will not even use it. I just want a credit card to reassure myself." Sure. Bailing out Fannie and Freddie was the goal from the very beginning. This government is doing a nice job of bringing America to its knees.

[bottom line]

Or listen to THIS guy, Thomas Frank, who just wrote "The Wrecking Crew (How Conservatives Rule)". Brilliant.

My library had it, yours might too!

I would also recomend "Greenspan's Fraud", because he certainly should take the lion's share of the blame for this whole economic crisis.

[sunsetbeachguy]

Peter:

Grow a spine.

Less than candid is weasly.

Bald faced liar or incompetent.

Barry Ritholtz has the best commentary on these "free market" communists.

Time for the torches and pitchforks.

[Tombstone Realty]

I'm voting that Peter was being sarcastic.

The moment that Paulson ran these "special only to be used in the most emergenciest of emergencies swear to GOD" powers over Freddie/Fannie, almost hyperventilating that weekend when he spoke -

I knew we were screwed like the county wh***. It was just a matter of time.

"Creative" is just another word for "barely legal".

[Jeff S]

What a joke analyzing Paulson's comments. "Liar", "Less than candid"" etc etc. blah blah blah.

Paulson tried a "verbal intervention" a time honored tradition of government officials to try to talk markets where they want them to go. It's worth a try and usually works in the very very short term but ultimately markets don't care.

You can't save a company, a currency, a sector, a region, a country or the world with verbal intervention but it is the cheapest form available.

[tarbubble]

%$#@&^!

Is there another country i could move to, maybe one that isn't looking quite so much like the Roman Empire circa 470? I never voted for any of these clowns in office (who appointed the clowns we are reading about), but the satisfaction of being right is really not getting me anywhere.

[sheila]

alas, it's coming too late to save Andrew McCain's bank, silver state, which just failed. he was on the "audit" committee when dear ole dad declared his candidacy, and was quickly shuffled off to an undisclosed location before this could all fall apart. silver state, spawn of keating 5. like father, like son.

[Michael Snyder]

From www.bloomberg.com, "Analysts have speculated that the Treasury would wipe out common shareholders, while seeking to shield preferred stock owners from total loss. Fannie and Freddie preferred shares are typically owned by banks and insurance companies. Their $5.2 trillion of debt outstanding is held by investors including Asian central banks, and would probably be guaranteed, analysts said."

Clearly this is just another piece of corporate welfare sponsored by the Bush Administration. Once again the taxpayer is bailing out millionaires while our children are using tattered text books and eating breakfast off the two day old rack to pay for it.

What is the great disaster in wiping out a Japanese bank's quarterly dividend when compared to the education of our children? Where is the social upheaval in having transparent accounting in the two largest publicly held mortgage companies in the country? Is anyone here really concerned about PIMCO's bottom line?

A casual perusal of Paulson's plan shows the market's concerns about its' long term viability. again from www.bloomberg.com. "Washington-based Fannie and Freddie dropped in after-hours trading. Fannie fell $2.25, or 32 percent, to $4.79 at 5:50 p.m. in New York Stock Exchange trading and Freddie slumped $1.40, or 27 percent, to $3.70." While I'm not a stock guy, word of such an impending move typically produces a positive bump in stock prices. A 27% drop in price shows that institutional investors are jumping ship.

We're back to that "crisis of confidence" conversation & the market's reaction to the Fed's move on this issue shows it has nothing to do with capital. It's all about integrity, or in this case the lack thereof.

[syscom3]

I will support these bailouts when I start seeing criminal convictions for the executives who helped to make this mess.

[amir]

To all naysayers,

As a tax payer, I obviously hate it, but there really is no other way. What they tried before, standing behind the debt while letting management keep running the company for their benefit, at the risk of tax payers, was terrible. That phase is now over and good riddance.

This was the right thing to do. They are not saved, since shareholders are wiped out and management is fired. It does NOT benefit the corporation. Effectively, it's finished. Kaput.

But to let these two giants collapse with their debt obligations could lead to a great depression. It would make getting a loan a mission impossible, not just improbable.

These two corporations need to be dissolved, but not in shock therapy. This way, the economy will keep on clicking. Obviously, as a tax payer I hate it, but I don't see any other way.

[anon1137]

Here we go, socializing the losses. I knew this mess would get transferred to the taxpayer one way or another. It was un-PC for the federal government to do a massive private sector bailout, so the GSEs have been buying up all the bad debt from banks for the past two years, and now guess what? The GSEs are insolvent! What a surprise! Of course, it's in the best interests of the all concerned, for the sake of rescuing the economy, to bail out the GSEs. It's our patriotic duty!

[LA]

All these executives - fired without severance?

NOT!

I bet the first billion will go toward very large, very golden parachutes.

[LA-renter]

On the radio, the Bush administration and "experts" are saying that "we" --the US treasury-- could lose as much as $20 billion...

Not that bad, really...

Until you remember that the Bush administration and neocon experts said that the Iraq war was going to pay for itself!

[CD]

They have a debt of 800 bilions right ? Is that the correct number? Good to see Michael Snyder back on the blog. If you guys think CITI goes next, I am heading to Smith and Barney in the AM monday. Now I am scared.

[Cheryl]

Ok....McShame is in bed with this and O'bama (whom I thought I would vote for but now...)says he's in favor of this bailout.....Is there REALLY ANYONE out there that is not in bed with these guys......Let them fail....and when are these guys fraud going to be courts....
My idea...lets start in each state a change to the constitution allowing only one term for any congressional office and only one term for presidency...then these people don't have to get in bed with all this unethical stuff to get funding for re-election....Any body from any of the other states willing to do this to really clean up and return to representative government:)?

[Tim C]

We keep hearing arguments of fear that if the federal government don't bail out Freddie/Fannie then it will lead to a great depression. The economy is headed down no matter what happens because the US has reached its credit limit that other nations are willing to bear, so it will continue to go downhill no matter what and credit will get tighter. The only difference in a bailout vs no bailout is who foots the bill - whether it hurts those irresponsible for issuing and taking out loans beyond their means (jumbo houses financed by jumbo mortgages), or everyone else who lived within their means (through inflation). If history is any indication (i.e. US in 1930s, Argentina), taking away wealth from the general population only prolongs a depression and when the magnitude of debt starts to exceed GDP in this case then we're effectively headed to communism and can expect to live in the same conditions as the former Soviet Union. Calling the US a democracy doesn't make it so.