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Fannie, Freddie Headed for Conservatorship

by: Michael Shedlock September 06, 2008 | about stocks: FNM / FRE    
Michael Shedlock

Michael Shedlock

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More Fannie, Freddie rescue details are slowing becoming available after hours. Please consider U.S. Nears Rescue Plan For Fannie And Freddie.

The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives and prop them up financially, federal officials told the two companies yesterday, according to three sources familiar with the conversations.

Under the plan, which could prompt one of the most sweeping government interventions in financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies' common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares might be protected by the government.

Instead of giving each company a big capital infusion upfront, the government could make quarterly injections as the companies' losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.

The chief executives of the two companies were called into afternoon meetings yesterday at the 17th Street NW offices of the Federal Housing Finance Agency, their direct regulator, sources familiar with the events said. Executives of the two companies were told to show up without being told of an agenda.

The plan was described by three sources: an official, a former official who was told of the plans and a mortgage industry executive with direct information. They spoke on condition of anonymity because its specifics had yet to be announced.

Placing the companies in conservatorship, rather than receivership, could signal that the government does not intend to nationalize or liquidate Fannie Mae and Freddie Mac. Instead, under the terms of a federal law passed this summer, conservatorship is designed to allow the government to restructure the companies and return them to private control. Treasury officials have previously compared the process to Chapter 11 bankruptcy.

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This article has 16 comments:

  •  
    Sep 06 03:14 AM
    It's amazing. It's like finding cocaine in your child's bedroom and you blame their cheerleading coach for not improving her technique.

    America is in DENIAL. And the fallout is tremendous. From Bill Clinton's lawyer (puppet) Jamie Gorelick to Susan Molinari the collateral damage to BOTH the DNC and RNC is historic. This is why the outrage is muted FOR NOW.

    99% of America just doesn't get it yet. But when they do get IT heads are going to roll. And people we know we don't like AND people we used to like should face the music. PRISON.

    Being a recipient of the bubble you'd think I'd be happy. NO. I care about America. And THEY took the most important asset class in the world and turned into a loose slut.

    SHAME ON YOU!!!
    Reply
  •  
    Sep 06 04:53 AM
    Anyone who went long these companies who had accounting scandals aregoing to get wha they deserve.When Buffett sold out that should have told you something.
    Reply
  •  
    Sep 06 06:15 AM
    The many mortgage borrowers simply followed the advice that shedlock advocated a few months ago - don't pay your loans. Those lenders were simply set up to ripoff the borrowers anyway so why should a borrower be expceted to make a payment after getting the money.

    Now we find that the lenders did not ripoff the borrowers nearly enough. There really, really, really was some outlay of money by the lenders. They needed to get it back, with interest. The Shedlock method of debt retirement sure seems to be causing the lending system to fail.
    Reply
  •  
    Sep 06 07:09 AM
    The nuance, conservatorship, will be lost as cattle stampede Monday because only Bloomberg understands the reorg revitalized the CURRENT structure with BACKUP loan authority. Symbolic board firings are window dressing BS.

    Saving Japan and Chinese investments in swollen mortgage paper built on liar loans is the goal. Saving Ameican shareholders? That's nicke and dime, but they get to be scapegoats dumb for investing in America, while the Chinese and Japanese pay for Republican wars that pop leadership's personal interests, like Cheney's 500% gain in Haliburton stock, waiting for him end of January 09. And the Fed has backed shorting commodities like gold and silver, to keep this from becoming a total rout...who knows if that will stem the tide, there isn't any physical silver and gold left to buy! Google Ted Butler who discovered that fiasco...designed to counter the Monday morning bloodbath.

    We finally got around those pesky freedoms granted in the Consitution, with financial slavery. Flip those burgers America, if you don't mind not looking too closely at what they call meat, the funding of what we do, and the making of our clothes, is all outsourced to someone else we have to back on the backs of the American taxpayer.
    Reply
  •  
    Sep 06 09:48 AM
    Why did financials rally after-hours after the news of the bailout? It makes no sense to me. Some stocks are close to their same share price before the financial markets tanked (before August 2006). Its as if investors are totalling ignoring this fact.
    Reply
  •  
    Sep 06 11:21 AM
    palsboss, I've read that a significant number of calls were purchased on the XLF (insiders?) in anticipation of monday morning, so someone in the know must believe the bailout will be received as a positive. It's all about perception and make-believe at this point.
    Reply
  •  
    Sep 06 12:38 PM
    So have they succeeded in avoiding triggering CDS's?


    Mr. Shedlock, since you don't allow hard questions on your blog, I'll ask them here:

    How does your strong dollar respond to this action long term?

    Is this 'deflationary'?

    Will the government allow deflation to take hold and further depress house prices now that even idiot "investors" can see that it owns mortgages outright?

    Will the government allow deflation to take hold when that means the army comes home from Iraq?

    Where will the money come from to pay for this? If they don't print it (inflationary) or borrow it (inflationary), then where?

    Will foreign investors continue to send good money after bad to keep propping up USD? If US long rates hit the roof, where will US gov get money?

    Will the logic of the printing press assert itself after all?

    Does this crisis end in default (destruction of the dollar) or inflation (destruction of the dollar)? Or is there a third way you'd care to enlighten us with?
    Reply
  •  
    Sep 06 12:39 PM
    palsboss: What on earth are you talking about? 2006 wasn't a high for many stocks, but even still, who is close to their high 2006 share price? Not BAC, WFC, C, WB, or any other major retail bank. Not LEH, MER, or any other major investment bank (GS is close, but they're down significantly from 2007 levels). FNM, FRE: still way down of course. AIG: hurting. Believe me, no one is ignoring the fact that the financial sector is in a hole. The rallies of the last few months have been anticipations of recovery a year or two down the line. If you're looking for maximum profits, you can't wait until everything looks sunny to buy.

    Anyone investing and following the news has been anticipating a FNM/FRE bailout for a while now. The possible negative effects and the other problems in financial companies were already reflected in the low prices. Financials rose on the news because the markets prefer certainty and the bailout sounds like a relatively measured and well-planned effort rather than a midday "Oh noes!!! FNM and FRE are worth nothing!!!" announcement. Even still financial prices are very low, and more institutions will fail. Investors are buying because companies that don't fail will be worth significantly more in the future.
    Reply
  •  
    Sep 06 01:06 PM
    The patients are still in the ICU and we are in the waiting room. The doctor hasn't come out to discuss the patients condition and prognosis. You can continue to freak out in the waiting room or you can just have patience and be still, confident that the Lord is with you.
    Reply
  •  
    Sep 06 02:48 PM
    When the news is officially announced, the dow will rise 400 points, you guys are all nuts.
    Reply
  •  
    Sep 06 06:24 PM
    Please explain to me why, if the GSE's, as we have been told by company executives, analysts and government officials, have plenty of capital to continue to operate for the next 6 quarters ($80 Billion between them) and the last auction the spreads were actually decreasing, why would the government step in now? Also can't firgure out why common share holders would be diluted if there is plenty of money on the books. The only reason they would need to dilute or wipe out shareholders is if they needed the money to settle up negative debt the company didn't have the assets to pay for.

    Also makes a lot of sense hiring MS to come up with a solution since they are choking on bad CDO's and need a place to dump them. Wonder how long it will take before LEH, MS, MER... suddenly fix their problems and we are notified that the problems are much worse at the GSE's. This is a scam to clean up the banks at the expense of the GSE's and the taxpayers.
    Reply
  •  
    Sep 06 06:58 PM
    FNM and FER should double on huge volume on Monday, since the assets were priced near zero!

    Have been buying LEH and ABK, since their book values are at a 60% discount......
    Reply
  •  
    Sep 06 07:52 PM
    Go get it,Petey,and good luck to ya...
    Reply
  •  
    Sep 06 08:40 PM
    Sheeple, the common on Phonie and Fraudie is now worth zero. Only the senior debt will be made square... all the less-than-senior debt is will rely on the credit default insurance (whoever holds it, how do you know it isn't ... me ?!? You don't.), the preferred and common are subordinated to that.

    Pfffffttttttt....
    Reply
  •  
    Sep 07 03:49 AM
    It's a great time to be a politician. Imagine all the "New Deals" that could be promised to string Americans along so they don't revolt when the tax machine cranks up. Here is my research mingled with opinion: www.ticktalklive.com/2.../
    Reply
  •  
    Sep 08 10:27 PM
    See two posts up. I was right.
    Reply
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