Government Takes Control of Fannie, Freddie

The Government on Sunday seized control of mortgage finance companies Fannie Mae and Freddie Mac, launching what could be its biggest federal bailout ever, in a bid to support the U.S. housing market and ward off more global financial market turbulence.

Officials were concerned mounting losses at the two companies, which own or guarantee

almost half of the country's $12 trillion in outstanding home mortgage debt, was sapping their vitality and threatening to undermine them at a time other sources of housing finance have largely run dry.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us," U.S. Treasury Secretary Henry Paulson said at a news conference. "Fannie Mae and Freddie Mac are critical to turning the corner on housing." (See accompanying videos of Paulson's and Lockhart's remarks below.)

Pre-market trading in Fannie Mae and Freddie Mac stock was suspended and trading will resume at 9:30 am New York time. In Europe, Fannie Mae and Freddie Mac's shares were down more than 50 percent before they were also suspended.

The two companies, publicly traded but also serving a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in any claims.

Their top executives were ousted. Freddie Mac chief executive Richard Syron and Fannie Mae's CEO, Daniel Mudd, were replaced by David Moffett, a former top official at US Bancorp and Herb Allison, formerly with Merrill Lynch and pension fund TIAA-CREF.

In addition, the U.S. Treasury will immediately take a $1 billion equity stake in each company in the form of senior preferred stock and if needed could inject up to $100 billion into each firm.

The government's senior preferreds stock would rank above both existing preferred and common shares and will carry warrants that could give the government an ownership stake of 79.9 percent.

Treasury also set up a program under which it would buy mortgage-backed securities currently

held by Fannie Mae and Freddie Mac to pump fresh funds into the mortgage market. It saidit would begin buying MBS later this month, and it would have authority to make such purchases through Dec. 31, 2009.

Paulson said Fannie Mae and Freddie Mac were so large that "a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

Several analysts said the move should help instill some confidence in shaky credit markets and lower mortgage costs.

"The government had to do something to eliminate uncertainty," said Peter Goldman, a principal with Front Barnett Associates in Chicago. "Anything that eliminates uncertainty in the credit markets is a good thing."