The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury in September 2008. It was one of the financial events among many in the ongoing subprime mortgage crisis.
On September 6, 2008, the director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III, announced his decision to place two Government sponsored enterprises (GSEs), Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), into conservatorship run by the FHFA.[1][2][3]
At the same press conference, United States Treasury Secretary Henry Paulson, stated that placing the two GSEs into conservatorship was a decision he fully supported, and that he advised "that conservatorship was the only form in which I would commit taxpayer money to the GSEs." He further said that "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction."[1]
The same day, Federal Reserve Bank chairman Ben Bernanke stated in support: "I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies."[4] The following day, Herbert M. Allison was appointed chief executive of Fannie Mae. He came from TIAA-CREF.[5]
The combined GSE losses of US$14.9 billion and market concerns about their ability to raise capital and debt threatened to disrupt the U.S. housing financial market. The Treasury committed to invest as much as US$200 billion in preferred stock and extend credit through 2009 to keep the GSEs solvent and operating. The two GSEs have outstanding more than US$ 5 trillion in mortgage backed securities (MBS) and debt; the debt portion alone is $1.6 trillion.[6] The conservatorship action has been described as "one of the most sweeping government interventions in private financial markets in decades,"[7] and one that "could turn into the biggest and costliest government bailout ever of private companies".[8]
With a growing sense of crisis in U.S. financial markets, the conservatorship action and commitment by the U.S. government to backstop the two GSEs with up to US$ 200 billion in additional capital turned out to be the first significant event in a tumultuous month among U.S.-based investment banking, financial institutions and federal regulatory bodies. By September 15, 2008, the 158 year-old Lehman Brothers holding company filed for bankruptcy with intent to liquidate its assets, leaving its financially sound subsidiaries operational and outside of the bankruptcy filing. The collapse is the largest investment bank failure since Drexel Burnham Lambert in 1990.[9][10] The 94 year-old Merrill Lynch accepted a purchase offer by Bank of America for approximately US$ 50 billion, a big drop from a year-earlier market valuation of about US$ 100 billion. A credit rating downgrade of the large insurer American International Group (AIG) led to a September 16, 2008 rescue agreement with the Federal Reserve Bank for a US$85 billion secured loan facility, in exchange for a warrants for 79.9% of the equity of AIG.
http://en.wikipedia.org/wiki/Fannie_a...
