Government seizes Fannie and Freddie

Sep 8, 2008 @ 10:20 am

By Aaron Siegel

The Department of The Treasury and the Federal Housing Finance Agency have taken over ailing mortgage finance companies Fannie Mae and Freddie Mac.

A spiking rate of mortgage defaults has threatened to bring down the companies.

This morning, The New York Stock Exchange announced that it suspended trading in Fannie and Freddie shares following the government takeover.

Under the terms of the agreement, both companies will be under government control indefinitely, the chief executives of both companies will be removed and the government will invest $100 billion in each company to make sure that they maintain a positive net worth.

The government said that stock in both companies will continue to be traded, but current shareholders will be unable to sell their stock until the government is no longer in control of the two lenders.

In an announcement made yesterday morning, Secretary of the Treasury Henry Paulson Jr. said that the decision to make an equity investment in the two struggling lenders was "necessary" and in the "best interest of the taxpayers."

The Treasury will initially purchase $1 billion of senior preferred stock, with warrants representing ownership stakes of 79.9% of Fannie Mae of Washington and Freddie Mac of McLean, Va.

The government will receive annual interest of 10% on the initial investments.

Meanwhile, dividends on both common and preferred shares will be eliminated in an effort to conserve about $2 billion annually.

Both companies' lobbying and political activities will be halted immediately, according to a statement.

Additionally, Herbert Allison, the former chief executive of TIAA-CREF of New York, will take over as Fannie's new chief executive.

David Moffett, who was formerly the vice chairman of U.S. Bancorp of Minneapolis, will become the chief executive of Freddie.

Fannie chief executive Daniel Mudd and Freddie chief executive Richard Syron will serve as consultants during the transition period.

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