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Treasury to Outline Fan-Fred Plan

By DEBORAH SOLOMON, JAMES R. HAGERTY and DAMIAN PALETTA
Wall Street Journal
September 7, 2008 12:42 a.m.

The U.S. Treasury is expected to announce early Sunday afternoon details
of a plan under which regulators will effectively take temporary control
over government-sponsored mortgage investors Fannie Mae and Freddie Mac.

The Treasury won't necessarily make a large injection of capital
immediately into the ailing companies, which provide the bulk of funding
for U.S. home mortgages. But people familiar with the plan said the
Treasury will stand ready to provide capital as needed, depending how
quickly losses deplete the companies' meager capital holdings.

The Federal Housing Finance Agency, Fannie and Freddie's regulator, is
to use its legal powers to put the companies under conservatorship.
Those powers allow the FHFA to run the companies indefinitely, under
certain conditions, such as when the regulator finds that they are
likely to be unable to meet their financial obligations. Fannie and
Freddie have run up combined losses totaling about $14 billion over the
past four quarters and face heavy additional losses amid the worst surge
in U.S. home-mortgage foreclosures since the 1930s.

Fannie and Freddie own or guarantee more than $5 trillion of U.S. home
mortgages, nearly half of the total outstanding.

Dividends on the companies' preferred stock are likely to be suspended,
people familiar with the plan say, and those on common shares to be
eliminated. Any injection of capital by the Treasury would likely
greatly reduce or wipe out the value of common shares currently
outstanding.

The conservatorship will involve the departure of Daniel Mudd, Fannie's
chief executive officer, and Richard Syron, Freddie's chairman and chief
executive, though they may not leave immediately and could help with the
transition. The FHFA will have to appoint conservators to run the
companies and try to restore them to financial health. Officials of the
companies were meeting Saturday with regulators to learn more details of
the plan, which appears to have come as a surprise to their senior
executives, who were summoned Friday to meetings with top officials from
the Treasury, FHFA and Federal Reserve.

The longer-run future of the companies will be up to Congress, which
created both of them to support the housing market, as well as the next
administration.

Treasury Secretary Henry Paulson briefed Sen. Barack Obama, the
Democratic presidential nominee, on Friday and spoke on Saturday with
Sen. John McCain, the Republican nominee.

In a statement Saturday, Sen. Obama called the situation "extremely
serious" and said it affects "our entire economy." He added: "Any action
we take must be focused not on the whims of lobbyists and special
interests worried about their bonuses and hourly fees, but on whether it
will strengthen our economy and help struggling homeowners."

Sen. Obama said the rescue also "must protect taxpayers, not bail out
the shareholders and management of Fannie Mae and Freddie Mac."

Alaska Governor Sarah Palin, the Republican nominee for vice president,
said during a rally Saturday afternoon in Colorado Springs, Colo., that
Fannie and Freddie have "gotten too big and too expensive to the
taxpayers." She added: "A McCain-Palin administration will make them
smaller and smarter and more effective for homeowners who need help."

The plan will also likely face immediate scrutiny from Congress as it
returns from a lengthy recess next week.

House Financial Services Committee Chairman Barney Frank (D., Mass.)
said he was "pleased" after a conversation he had late Friday with Mr.
Paulson about Treasury's "strong reaffirmation that the vital roles
these institutions play in our nation's housing markets must continue."

Mr. Frank said he would evaluate any plan by how it protects taxpayers,
restores stability to financial markets and ensures the availability of
affordable housing.

Speaker of the House Nancy Pelosi (D., Calif.) said she would work "in a
bipartisan manner" with Mr. Paulson, other Bush administration officials
and congressional leaders to review the plan "to ensure that the
interests of taxpayers and the broader economy are protected."

--Laura Meckler