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Fed Fights Fannie/Freddie Failure
Treasury Dept.’s call to shift mortgage financiers to government control preserves credit in housing and triggers investment optimism.
September 8, 2008
The US Department of Treasury’s announcement Sunday that it has taken over beleaguered mortgage finance giants Fannie Mae and Freddie Mac has created optimism among investors and could save each firm from a fate that had, once, potential to threaten the entire American housing market.
In a move that Treasury Secretary Hank Paulson said would create additional stability within financial markets, preserve the availability of mortgage finance and protect taxpayers, the Federal government’s bailout could create up to $200 billion in capital to keep the mortgage companies from failing.
While the move is purported to be a boon to financial services companies as a whole, Fannie and Freddie took hard hits in early Monday trading, as expected: each lost about 75% of its value in early trading, thanks to government-enacted stipulations surrounding the companies’ stock.
Common stock and preferred dividends have been eliminated and subordinated debt interest and principal payments will continue to be made.
In announcing the fed takeover of the mortgage giants, Paulson also announced that Herbert Allison Jr. and David Moffett have been selected to run Fannie Mae and Freddie Mac, respectively. They will be doing so at what is expected to be a significantly lesser pay.
The Dow Jones, NASDAQ and S&P indices each leapt in early Monday trading, in part on the news.
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