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

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Photo Credit: Bloomberg News

Comments

[Rational Renter]

They have mortgages totalling 5 trillion dollars.

[stephen mcelroy]

So what happens to all the naked shorts? x shares outstanding. 2(x shares) shorted = 2x shares perchased and stuck at 0 value. Therefore the naked shorts issue goes away. The naked shorters have their profits and will never have to buy back worthless shares to make good on delivery. If they had had to buy back all the shorted shares to make delivery, the price of the stocks would have been driven up as 2x shorts competed for only x shares. This sweeps the issue of illegally naked shorting under the rug. Does it not?

[Steve]

These bald headed losers do not have a clue, after all they got us in to this nightmare. It is this simple nothing will change until you lower mortgage rates by a full point.