As we’ve written here in the past, things aren’t exactly rosy in the U.S. when it comes to the dollar, housing, and other such issues.
The U.S. Gov’t has just committed an unprecidented act and taken over the 2 largest housing finance institutions in the United States, Freddie Mac and Fannie Mae.
(The) government (is now) in charge of the twin mortgage giants and the $5 trillion in home loans they back.
The move, which extends as much as $200 billion in Treasury support to the two companies, marks Washington’s most dramatic attempt yet to shore up the nation’s housing market, which is suffering from record foreclosures and falling prices.
The sweeping plan, announced by Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency, places the two companies into a “conservatorship” to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.
Of course, with the government now owning the debt of the people and, well, let’s be honest… the Chinese mostly owning most of the debt of the U.S., does that mean the Chinese will have some say in the running of the companies? Eh… that’s another thread for another time.
So how did it all get here?
Sunday’s announcement brings an end to months of speculation about the fate of the two firms. Shares of Fannie and Freddie, which have fallen more than 80% as of the end of Friday’s session, were hammered this summer among concerns they would need to raise additional funds to cover future losses or need to be taken over by its federal regulator. Investors feared that either step would reduce or wipe out the value of current shareholders’ stakes.
In mid-July, the Treasury Department and Federal Reserve announced steps in to make funds available to the firms if necessary and Congress approved the sweeping proposals later that month.
Shortly thereafter, regulators stepped up their review of Fannie and Freddie. Paulson announced in August that he had tapped Wall Street firm Morgan Stanley (MS, Fortune 500) to help him examine the firms.
Sources familiar with the matter told Fortune that Morgan Stanley had determined that both Freddie and Fannie faced “meaningful” capital issues before deciding last week that government intervention was necessary. Morgan Stanley has called a firm-wide meeting on Monday morning to explain the deal.
Officials ruled out a capital infusion - a less drastic option than convervatorship - after considering questions such as whether the government would have to keep putting money in and how best Treasury officials could protect taxpayers, according to one of the sources.
In the end, the route taken amounts to “a timeout, not a liquidation,” says the source. “Conservatorship leaves all options open for the next administration.”
Following an exhaustive review, FHFA’s Lockhart said Sunday that the two companies could not continue to operate without taking “significant action.”
Fannie and Freddie have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to do so is crucial to the recovery of the battered home market and the broader U.S. economy.
The two firms buy loans, attach a guarantee, then sell securities backed by the loans’ income stream. All told, they own or back $5.4 trillion worth of home debt - half the mortgage debt in the country.
Well, that sounds like some considerably bad mojo. Of course, taking a government that’s ridiculously in debt and putting them in charge of 2 major financial institutions that are ridiculously in debt seems like a really great idea though, doesn’t it?
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