U.S. Will Take Over Fannie Mae and Freddie Mac

The Bush administration announced this morning that the federal government will take over Fannie Mae and Freddie Mac in a move to avert a potential financial disaster in the domestic housing market as well as the global financial markets.

U.S. Treasury Secretary Henry Paulson, along with Federal Housing Finance Agency Director James Lockhart, said in a statement, "Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

The FHFA will take over Fannie and Freddie under a conservatorship, replacing their chief executives and eliminating their dividends. Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac, the Associated Press reported. Fannie chief executive officer Daniel Mudd and Freddie chief executive officer Richard Syron will serve in a transition period as consultants, Lockhart said in a statement.

Bloomberg reported that the Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

The takeover of Fannie and Freddie is the biggest step yet in officials' efforts to grapple with a yearlong credit crisis that has caused more than $500 billion of losses and writedowns, Bloomberg said in its report. The government is taking an increasing role in financial markets, after the Federal Reserve six months ago provided $29 billion of financing to prevent Bear Stearns & Cos.'s collapse.

"The government wasn't going to allow them to muddle through this mess," Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Va., told Bloomberg. "No way were they going to be able to do that because the market was going to freeze up."

The text of Paulson and Lockhart's announcement is here.