US Treasury Secretary, Hank Paulson, announced a few minutes ago the plan to takeover the mortgage giants, Fannie Mae and Freddie Mac. Paulson laid out the goals, and FHFA Secretary, Jim Lockhart, discussed the actions taken.

US Treasury Goals

Paulson started the press conference by laying out the goals of the bailout as follows:

1. Provide stability to financial markets
2. Provide the mortgage market with continued mortgage availability and liquidity
3. Protecting the taxpayer

In Paulson’s own words,

“Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers - both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure. “

US Treasury Actions

Since a simple equity injection would not solve the problem, the government decided a set of 4 actions would.

1. Fire the current management, taking over day-to-day operations of Fannie and Freddie

2. Establish a Preferred Stock Purchase Agreement between Treasury and the GSEs keeping the each company’s net worth positive stating this action combined with conservatorship does not eliminate the preferred and common share stockholders, but does place them both in second to last and last respectively, in terms of claims against assets.

3. Establish a new government secure lending source which will provide liquidity to continue operations should normal capital markets stay frozen or take time to return to Fannie and Freddie.

4. Establish a program to purchase GSE mortgage-backed securities which will expire with the Treasury’s temporary authorities in December 2009

Jim Lockhart said,

“Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.”

FHFA put out a “fact sheet” on conservatorship and what it means.

It seems the US Treasury and FHFA are trying to have their cake and eat it too…but what did we really expect?

Time will tell whether the market reacts positively or negatively to the bailout plan. My guess is Wall Street will love it and Main Street will ignore it. Joe Sixpack doesn’t know he just got served up on a platter to make Bill Gross, foreign central bankers, and the many domestic financial, banking, and investment firms very happy.

Maybe Joe will care when the $400 Billion bill comes in a few years?

I doubt it even then…

Good Luck!

Previous Post:«

Next Post:»

Tags: • • •