Waiting for the Takeover (Updated)

Speculation continues to swirl about an impending takeover of the public/private hybrid mortgage giants FNMA and FHLMC:

The Bush administration yesterday prepared to take over the troubled housing finance companies Fannie Mae and Freddie Mac, after concluding the companies don’t have enough capital to continue to play their crucial role funding home mortgages.

Under the plan, engineered by Treasury Secretary Henry M. Paulson Jr., the government would place the two companies under “conservatorship,” a legal status akin to Chapter 11 bankruptcy. Their boards and chief executives would be fired and a government agency, the Federal Housing Finance Agency, would appoint new chief executives.

The action, which would be one of the most sweeping government interventions in private financial markets in decades, is planned for today, according to several sources.

Brad DeLong questions the timing:

I don’t see the necessity for nationalizing Fannie and Freddie right now. They both are still cash-flow positive, right? If they fail to rollover their bonds and become cash-flow negative, the Treasury can finance them with preferred plus warrants, right? There is an argument to be made on the side of equity for expropriating the common shareholders–they and their predecessors have made fortunes in the past by playing off of their quasi-public status, and that wealth properly belongs to the taxpayers.

Tyler Cowen wonders about the purpose of the takeover:

The deal also seems to recognize that any one-off “solution” (e.g., a once-and-for-all recapitalization with a new and more senior class of stock) would recreate moral hazard problems and thus is unacceptable. Or is it Paulson saying he is done and he wants either Obama or Palin to have to worry about this? Or is this really about protecting the dollar rather than choosing the best institutional structure for the agencies? I believe that at least forthcoming home buyers will be better off, as Congress will not want to look responsible for higher mortgage costs.

It’s always possible, I guess, that this move is being taken because our leaders just don’t know what else to do.

BTW, you might want to take a gander here at who the shareholders of FNMA actually are. While the big individual shareholders are the officers and board members of the organization, the largest actual shareholders are mostly mutual funds.

In practice that means that a lot of us are going to be bitten twice by this move: first in our IRA’s by the loss of shareholder value and then second as taxpayers by the billions that the federal government will need to pour in to shore up the mismanaged institutions which will eventually be reflected in higher taxes.

Pay attention. This is shaping up as the biggest business and economics story of the year.


There has been an official statement from the Treasury Department. Hat tip: Calculated Risk

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