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Treasury Official Explains Fed’s Move to Rescue Housing Firms

After a recap of the weekend's news on the government takeover of housing giants Fannie Mae and Freddie Mac, acting Treasury Undersecretary Andrew Ryan details the move.

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  • KWAME HOLMAN:

    The Treasury Department's decision yesterday to take over the mortgage giants came after both companies faced serious problems securing enough money from private sources to purchase new mortgages.

    Treasury Secretary Henry Paulson announced the dramatic move.

  • HENRY PAULSON, U.S. Treasury Secretary:

    A failure of either of them would cause great turmoil in the financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth, from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans, and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.

  • KWAME HOLMAN:

    Fannie Mae and Freddie Mac are by far the largest providers of U.S. home loan financing, owning or guaranteeing some $5 trillion in loans, about half the outstanding mortgages in the United States.

    The companies were created by the government decades ago to help more Americans afford the cost of buying a home. The pair are unusual entities, private companies that are traded on the stock market, but operate as government-sponsored enterprises, or GSEs.

    But, as mortgage defaults have continued to rise, Fannie and Freddie have racked up about $12 billion in losses.

  • HENRY PAULSON:

    Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.

  • KWAME HOLMAN:

    Under the plan, both companies have been placed in a conservatorship to be restructured, similar to a bankruptcy process. Top officers were replaced, and overall control was given to a federal regulator. And the government can provide money as needed, up to $200 billion total, for the two companies.

    The government also would guarantee the investments of bondholders, who hold huge amounts of debt issued by Fannie and Freddie. Those bondholders include pension funds, mutual funds and central banks overseas.

    But shareholders of Fannie and Freddie stock would not be protected. Eighty percent of the companies would now be owned by the government. A shareholder's stake would be reduced to just 20 percent of the value of either company. Fannie and Freddie would be forced to reduce their portfolios by 10 percent a year, beginning in 2010.

    SEN. RICHARD SHELBY (R), Alabama: What's the trigger? At what point, in other words?

  • KWAME HOLMAN:

    Paulson received congressional approval in July to use taxpayer funds to finance an intervention, but expected at the time that having the authority to do so would be sufficient.

  • HENRY PAULSON:

    There are no plans to access either of these temporary backstops. If accessing them becomes necessary, we would do so only under terms and conditions that protect the U.S. taxpayer.

  • KWAME HOLMAN:

    Stock prices around the globe rallied today on news of the takeover. The move also was supported on the presidential campaign trail. Both Democrat Barack Obama and Republican John McCain said the bailout was necessary, but said they had some concerns.

    SEN. JOHN MCCAIN (R-AZ), Presidential Nominee: Today, we're looking at costly government-led restructuring of our home loan agencies. We need to keep people in their homes, but we can't allow this to turn into a bailout of Wall Street speculators and irresponsible executives.

    SEN. BARACK OBAMA (D-IL), Presidential Nominee: So much of this housing crisis could have been prevented if the feds had done their job regulating many of these agencies. Now, not only are people losing their homes, but taxpayers are also going to be potentially on the hook for some of the bill.

  • KWAME HOLMAN:

    The treasury secretary said he expects the takeover to provide stability for now, but Congress and the next president will have to act on the long-term future of Fannie Mae and Freddie Mac.