WORLD> America
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WORLD> America
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US government takes over mortgage giants
(Agencies)
Updated: 2008-09-08 06:32 The Treasury Department said it will immediately be issued $1 billion in senior preferred stock, paying 10 percent interest, from each company, but eventually could be required to put up as much as $100 billion for each over time if the funds are needed to keep the companies afloat as losses mount. The government also will receive warrants representing ownership stakes of 79.9 percent in each. Officials defended this approach by saying it underscores the importance of the trillions in mortgage debt that each company either holds or guarantees and the need to make sure that investors in this country and overseas keep buying this debt.
The impact on existing common and preferred shares, which have slumped in value in the last year, will depend on how investors react to Paulson's assertion that they must absorb the cost of further losses first. Under the plan, dividends on both common and preferred stock would be eliminated, saving about $2 billion a year. After the Treasury Department's announcement, credit rating agency Standard & Poor's downgraded Fannie and Freddie's preserved stock to junk-bond status, but reaffirmed the US government's triple-A rating. The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans." The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission. Under government control, the companies will be allowed to expand their support for the mortgage market over the next year by boosting their holdings of mortgage securities they hold on their books from a combined $1.5 trillion to $1.7 trillion. Starting in 2010, though, they are required to drop their holdings by 10 percent annually until they reach a combined $500 billion. In addition, officials said the Treasury Department plans to purchase $5 billion in mortgage-backed issued by the two companies later this month. Paulson said that it would be up to Congress and the next president to figure out the two companies' ultimate structure and the conflicting goals they operated under -- maximizing returns for shareholders while also being required to encourage home buying for low- and moderate-income Americans. "There is a consensus today ... that they cannot continue in their current form," he said. Paulson and James Lockhart, director of the Federal Housing Finance Agency, stressed that their actions were designed to strengthen the role of the two mortgage giants in supporting the nation's housing market. Both companies do that by buying mortgage loans from banks and packaging those loans into securities that they either hold or sell to US and foreign investors. He said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises. Sunday's actions followed a series of meetings Paulson had with President Bush and other top administration economic officials with Bush relying heavily on the judgment of Paulson, who was the head of investment giant Goldman Sachs before he joined the Cabinet in 2006. "It is really an assent to Hank's direction, guidance and judgment. The president was going to support Hank's judgment on this," said a senior administration official, who spoke on condition of anonymity to discuss behind-the-scenes deliberations. This official said that Paulson kept Bush updated on the worsening situation at Fannie and Freddie on a regular basis starting in late July when Congress approved expanding the amount of federal support the institutions could receive. |
