US government takes over control of Fanny Mae and Freddy Mac

Just  a day after the bailout plan was announced, the US Treasury Department seized control of Fannie Mae and Freddie Mac, the nation's giant quasi-public mortgage finance companies, and announced a four-part rescue plan that includes an open-ended guarantee from the department to provide as much capital as required to ward of insolvency.(See: Government bail-out for US mortgage giants FannyMae and FreddyMac)

At a news conference yesterday morning, US treasury secretary Henry Paulson announced the dismissal of the two companies' CEOs and their replacement by senior finance executives Herbert M. Allison Jr. and David M Moffett. (See: Henry Paulson's statement at the end of this article)

Allison, the former head of retirement-plan manager TIAA-CREF, was named CEO of Washington-based Fannie Mae. Moffett, a Carlyle Group executive who was once vice chairman of US Bancorp, will head McLean, Virginia-based Freddie Mac. Their pay packages ''will be significantly lower than the outgoing CEOs,'' Federal Housing Finance Agency Director James Lockhart, the companies' regulator, said in a statement yesterday.

Allison and Moffett are stepping in where their predecessors failed. Fannie CEO Daniel Mudd and Freddie's Richard Syron, both hired in 2004 to help the companies recover from accounting scandals, led the firms into riskier investments, moving well beyond their public mission of housing affordability, and then failed to react quickly enough when the sub-prime-mortgage market began to deteriorate in 2007.

Fannie has lost 88 per cent of its market value since Mudd was elevated from his interim post as CEO in June 2005. The stock, which was near $60 a share at the time of his promotion, reached a closing high of $69.49 in June 2007 before beginning a freefall to $7.04 on 5 September of this year.

Freddie followed a similar pattern, starting out near $60 at the time of Syron's hiring, peaking at $73.70 in 2004, and then beginning a drop in 2007 to $5.10 three days ago. Ultimately, shareholders have lost about 91 per cent during Syron's tenure.

The Federal Housing Finance Agency will take over Fannie and Freddie under a so-called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury can purchase as much as $100 billion of a special class of stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.