Saturday, September 6, 2008

First Bear Stearns, now Fannie Mae and Freddie Mac

Figure: Median home values, 1987-2008. Source: Paul Krugman

Nationalizing the Housing Downturn

Will America's economic problems force the country to place its key market institutions under government control?

In the case of the housing downturn, the answer appears to be yes.

The Wall Street Journal is reporting that the US government will soon move forward on a plan to take over Fannie Mae and Freddie Mac, previously private companies that together hold over $5 trillion in mortgages.

The two companies have been struggling mightily during the recent year-long housing downturn and credit crisis. Fannie Mae's stock price has plummeted the past year, from the high 60s to single digits (as I write this it is trading at 7.12). Freddie Mac's stock is at 5.10, down from a 52-week high of 65.88. These are declines in value of 90% and 92%, respectively!

From the report:

The Treasury Department is putting the finishing touches to a plan designed to shore up Fannie Mae and Freddie Mac, according to people familiar with the matter, a move that would essentially result in a government takeover of the mortgage giants.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily. It is also expected to involve the government injecting capital into Fannie and Freddie. That could happen gradually on a quarter-by-quarter basis, rather than in a single move, one person familiar with the matter said.

In addition, Treasury's plan includes a top-level management shakeup at both companies, according to people familiar with the plans. Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts eventually.

An announcement could come as early as this weekend. Some details are still being worked out, and terms of the arrangement could change.

Any move by Treasury would represent perhaps the most significant intervention by the government in the financial industry since the housing bust touched off turmoil in the credit markets a little more than a year ago. From the $168 billion economic-stimulus package in February through the bailout of investment bank Bear Stearns Cos., the Bush administration and the Federal Reserve have taken an increasingly aggressive stance in responding to what has become one of the worst financial crises in decades.

The government buyout of Bear Stearns last March, and now the coming nationalization of the two mortage giants, begs the question: What is the future of America's private market economy? How much longer will we have one?

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