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Feds Take Over Fannie Mae, Freddie Mac

Taxpayers on the hook for billions in loans

September 8, 2008

Treasury Secretary Henry Paulson said the U.S. Treasury will acquire controlling interest in both firms and pledge up to $200 billion to help them offset the massive losses they have suffered on bad mortgages. For the time being, the Federal Housing Finance Agency will manage the day-to-day operation of the two companies.

Paulson said the government acted under power granted by Congress in July, when lawmakers gave the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac.

"Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs, including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action."

Paulson said the seizure has three goals: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers, both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

"Based on what we have learned about these institutions over the last four weeks, including what we learned about their capital requirements, and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form," Paulson said.

While the move saddles the U.S. taxpayer with responsibility for billions of dollars in loans made by private lenders, Paulson said the risk of doing nothing is even greater. He says that more than $5 trillion of debt and mortgage-backed securities issued by the two companies is owned by central banks and other investors world-wide. Stabilizing the two companies, he says, will help stabilize the housing market.

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