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Government takes control of Fannie, Freddie

Move is intended to prevent major financial turmoil

BREAKING NEWS MSNBC News Services

WASHINGTON – The U.S. government announced on Sunday that it was taking control of troubled mortgage finance giants Fannie Mae and Freddie Mac, effectively wiping out shareholders’ interest in the publicly traded companies.

The regulator of the two companies, the Federal Housing Finance Agency (FHFA) will manage the two companies on a temporary basis.

The takeover is the second rescue bid engineered by the U.S. Treasury Department in little more than six weeks. It came as confidence in the firms’ ability to keep operating amid a deepening housing crisis continued to erode.Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart, regulator for the so-called GSEs or government-sponsored enterprises, called a Sunday-morning news conference to spell out the latest rescue effort.

Officials said the executives of both institutions had been replaced. Herb Allison, a former vice chairman of Merryl Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.

Paulson said the actions were being taken because “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe.”

“A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance,” Paulson said.

Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.

The Federal Reserve and other federal Banking regulators said in a joint statement Sunday that “a limited number of smaller institutions” have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were “prepared to work with these institutions to develop capital-restoration plans.”

The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.

The announcement followed an intense round of meetings on Friday and Saturday with directors and top leaders of the GSEs, who are expected to be dismissed after having come under stiff criticism for their high pay and management shortcomings.

The two mortgage companies are a vital cog in the United States housing industry because they own or guarantee almost half the nation’s $12 trillion in outstanding home mortgage debt. The housing sector would have difficulty recovering from its deepest slump since the Great Depression unless Fannie or Freddie are stabilized and able to continue their role in buying mortgage loans and packaging them into securities sold around the world.

This breaking news story will be updated.

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  • rfp July 18, 2012, 3:40 PM

    A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance …. like the idea !

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