What Is Happening to Fannie & Freddie

Major Points

• Fannie and Freddie have been placed in conservatorship. (Federal government has taken 79.9 percent of common stock and all dividends in return for buying $1 billion of preferred shares.)  Top Fannie/Freddie executives have been replaced.)  In return, the Treasury will receive new senior preferred stock and warrants on the GSE’s (Government Sponsored Entitites) common stock.
• Treasury Department says both are open for business with no major changes in operations.
• Fannie/Freddie can grow their guaranteed mortgage book with no limits and grow their retained portfolios with limits. Ultimately, the government plans to shrink their portfolios (10% per year starting in 2010).
• The federal government will provide capital to keep Fannie/Freddie’s net worth positive (up to $100 billion)
• The federal government will begin buying Fannie/Freddie mortgage-backed securities (MBS) on the open market.
• Treasury Department will create a Secured Lending Credit Facility, a liquidity backstop for GSEs

• World markets respond positively to news: stocks up on Monday, September 8, 2008.

• Federal Reserve Chairman Ben Bernanke: “These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets.”
• Investor Warren Buffett: “Secretary Paulson has made exactly the right decision for the country.  He is minimizing the problem of moral hazard and maximizing the benefits for the housing market and for the smooth functioning of financial markets.”