Fannie, Freddie Takeover Plan Weeks In Making

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Markets are still adjusting to the Treasury Department's decision to take over Fannie Mae and Freddie Mac. The announcement took Fannie and Freddie executives by surprise, but federal regulators had been working out the plan's details for weeks.


From NPR News, this is ALL THINGS CONSIDERED. Im Melissa Block.


And Im Robert Siegel.

Well, now that Fannie Mae and Freddie Mac are under government control, Democrats in Congress are urging them to suspend foreclosures for at least 90 days.

Members of the Senate Banking Committee asked the companies to do more to help keep people in their homes. Fannie and Freddie backed nearly half the outstanding mortgages in the U.S.

BLOCK: This drama has been going on for months. The events that brought about last weekends government takeover began in earnest in March.

NPRs John Ydstie walks us through whats happened since then.

JOHN YDSTIE: The irony is that just six months ago, despite concerns about their future, Fannie and Freddie were declared sound by their regulator, James Lockhart. On March 19th in New York City, he told Wall Street the two were ready to rescue the U.S. mortgage market.

Mr. JAMES LOCKHART (Regulator, Fannie Mae and Freddie Mac): I think the actions were taking today and the prudence that they have displayed over the last year makes bailout talks nonsense. These companies are safe and sound, and were going to ensure by our everyday oversight that they continue to be safe and sound.

YDSTIE: But investors werent buying it. As the U.S. housing market continued its collapse, questions were swirling about the health of the two firms that hold or guarantee more than $5 trillion in mortgages. And by mid-July, Treasury Secretary Henry Paulson was before Congress, urging them to give him virtually unlimited authority to spend taxpayer money to keep them afloat.

He needed the power, he said, but he didnt think hed have to use it.

Secretary HENRY PAULSON (U.S. Department of Finance): If youve got a squirt gun in your pocket, you may have to take it out. If youve got a bazooka and people know youve got it, you may not have to take it out. It will increase confidence, and by increasing confidence, it will greatly reduce the likelihood it will ever be used.

YDSTIE: With broad powers, Paulson hoped to calm investors and give Fannie and Freddie time to raise new capital, a cushion against big losses that was sure to come as many mortgages they held and guaranteed went bad.

Congress gave Paulson his bazooka on July 26th. Within a week of getting it, he hired the Wall Street firm Morgan Stanley to help him figure out if he really would have to use it.

In the next couple of weeks, about three dozen Morgan Stanley bankers, along with federal regulators from the Federal Housing Finance Agency, pored over the mortgage giants books and found theyre much worse off than expected.

Meanwhile, investor confidence continued to deteriorate, including among foreign governments, whose central banks hold huge amounts of Fannie and Freddie bonds - bonds bought with a belief that in a pinch, the U.S. government would back them.

On August 19th, market analyst James Rosner was skeptical about the future of the firms.

Mr. JAMES ROSNER (Market Analyst, Graham Fisher): Well, I mean, I dont know if you can say you dump it. If you own at it at this point, do I think theres a good chance that the equity ends up wiped out? Yeah, I do.

YDSTIE: Bond investors were telling Morgan Stanley bankers that the government needed to inject capital to boost confidence. But when asked how much, it soon became clear only a massive infusion could hope to calm the markets.

According to NPR sources present at many of the meetings Paulson decided that it wasnt in the cards because it would involve injecting taxpayer money with no real control of the companies.

There were two other options being considered: a conservatorship - similar to Chapter 11 bankruptcy - from which companies can emerge, or receivership, a total takeover at the company.

On August 26th, Paulson went to the White House Situation Room. He was connected by video conference with President Bush at his ranch in Crawford. He described how a conservatorship might work.

Deputy Press Secretary Tony Fratto.

Mr. TONY FRATTO (Deputy Press Secretary): The president certainly agreed during that teleconference that Secretary Paulson had the right plan.

YDSTIE: The final shape of the takeover came after a grueling series of meetings over the Labor Day weekend. Those assembled agreed that putting Fannie and Freddie into conservatorship was the right move. It gave the government at least temporary control of the companies, and time for the new Congress and administration to decide on their long-term future.

Paulson met with the leaders of Fannie and Freddie the following Friday to tell them they would be taken over. Reports suggest both Daniel Mudd of Fannie Mae and Richard Syron of Freddie Mac were surprised.

They were told to tell their boards a takeover was inevitable, with or without their approval. Then, on Sunday morning, when world markets were closed, Paulson made the announcement. He said a takeover was necessary to protect the worlds financial system.

Sec. PAULSON: 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 horrible to economic growth and job creation. That is why we have taken these actions today.

YDSTIE: Paulson said among other things, the Treasury would provide credit lines worth $100 billion for each company. With money like that on the line, this takeover could become the biggest bailout in U.S. history.

John Ydstie, NPR News, Washington.

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