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Treasury Takes Over GSEs

Fannie Mae and Freddie Mac are effectively moving under government control, after several weeks of uncertainty.

By Erika Morphy | Updated on September 08, 2008

After weeks of insisting that Fannie Mae and Freddie Mac had enough capital to maintain operations, the Treasury Department abruptly decided otherwise. News reports that Treasury was going to move the two agencies into conservatorship began to leak on Friday evening, shortly after Daniel Mudd and Richard Syron, the CEOs of Fannie Mae and Freddie Mac, respectively, were reportedly informed they would be leaving their posts. By Sunday – in time to beat the opening of the Asian markets, which holds in excess of $340 billion of Fannie Mae and Freddie Mac mortgage-backed securities – the Treasury Department announced the news.

“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,” Secretary Henry Paulson says in a prepared statement. The transition, not surprisingly, calls for a number of radical steps in both the short and long term. As the conservator, the Federal Housing Finance Agency will assume the power of the Board and management. Mudd and Syron will also be leaving – although they have agreed to stay on to help with the transition.

Herb Allison, the vice chairman of Merrill Lynch and for the last eight years chairman of TIAA-CREF, has been tapped to be the new CEO of Fannie Mae and David Moffett will be Freddie Mac’s new head. Moffett was the vice chairman and CFO of US Bancorp. Finally, the common stock and preferred stock dividends will be eliminated, while common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.

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