Washington takes over Fannie Mae, Freddie Mac End of an era comes, as Paulson says equity buy wouldn't have been enough By Greg Morcroft & Greg Robb, MarketWatch Last update: 2:38 p.m. EDT Sept. 7, 2008Comments: 375WASHINGTON (MarketWatch) - In the biggest government bailout in U.S. history, the Treasury said Sunday that regulators are seizing control of home mortgage giants Fannie Mae and Freddie Mac. Under a sweeping plan, the two companies will be run by the government indefinitely, with the two current chief executives to be replaced and the government investing up to $100 billion in each firm to keep them solvent. Common shares in the two remain outstanding, though Treasury officials didn't immediately say whether they would trade as usual on Monday. In order to improve the availability of mortgages, Treasury will start buying Freddie and Fannie's mortgaged-backed debt in the open market. The companies will also end all lobbying of the government and eliminate dividends. Together, Fannie Mae and Freddie Mac form the cornerstones of the U.S. mortgage market and own or guarantee almost half the home loans in the country's roughly $12 trillion mortgage market. Over the past year, the companies have recorded combined losses of around $14 billion. The move puts the U.S. government at risk to lose tens of billions of dollars. Necessary action The end for Fannie and Freddie's independence came shortly after 11:00 am, when Treasury Secretary Henry Paulson told reporters that a careful review of the two mortgage giant's books made it "necessary to take action." James Lockhart, the head of Federal Housing Finance Agency which will now oversee Freddie and Fannie, said the recession in the housing market ultimately ate away at the two firms' capital. "As house prices, earnings and capital have continued to deteriorate, Fannie and Freddie's ability to fulfill their mission has deteriorated. In particular, the capacity of their capital to absorb further losses while supporting new business activity is in doubt," Lockhart said. There were reports that auditors called in by Treasury and FHFA had found accounting irregularities at the two firms and that their capital base was smaller than expected. At first, Paulson had talked in terms of an equity investment in the two firms. But after the review, a full-scale takeover of the two firms was seen as the only option. Federal Reserve Chairman Ben Bernanke said that he fully supported the government takeover. "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," Bernanke said. FHFA in charge, CEOs leaving Technically, the government placed the two companies in conservatorship. The FHFA will assume the power of the board and management. Paulson said the move won't eliminate Freddie and Fannie's common stock, but "does place common shareholders last in terms of claims on the assets of the enterprises." Preferred stock shareholders will be "second, after the common shareholders, in absorbing losses," he said. The move will also replace the chief executives of both Fannies Mae (FNM:Fannie Mae News, chart, profile, more Last: 7.04+0.62+9.66% 4:02pm 09/05/2008 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: FNM 7.04, +0.62, +9.7%) and Freddie Mac (FRE:Freddie Mac News, chart, profile, more Last: 5.10+0.15+3.03% 4:02pm 09/05/2008 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: FRE 5.10, +0.15, +3.0%) . Fannie Mae Chief Executive Daniel Mudd and Freddie Mac CEO Richard Syron will leave their positions after a brief transitional period. Mudd will be replaced by Herb Allison, the former vice chairman of Merrill Lynch (MER:Merrill Lynch & Co., Inc News, chart, profile, more Last: 26.73+0.52+1.98% 4:02pm 09/05/2008 Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: MER 26.73, +0.52, +2.0%) and who is currently chairman of the TIAA-CREF teachers' pension funds. Syron will be replaced by David Moffett, who was the vice chairman and chief financial officer of U.S. Bancorp. In essence, the plan is similar to a Chapter 11 bankruptcy that will give the two companies breathing room to reorganize. Paulson said the plan was a "time out" to stabilize the two companies. Congress will have to decide their future role and structure, he said. Government buying stock, MBS To support the plan, Treasury will purchase up to $100 billion in each company to ensure they maintain a positive net worth. It will also buy mortgage-backed securities from the firms in the open market, with a lending facility held at the Federal Reserve Bank of New York. Under the terms of the proposal, the government would make periodic injections of funds by buying either convertible preferred shares or warrants in the two companies as needed, as opposed to a large, up-front cost. Massive assets involved http://www.marketwatch.com/news/sto...96B-CB3C-47A8-8A56-284A9A4D5C85}&siteid=yhoof