Fannie and Freddie Seized
As expected the Feds moved in to seize Fannie Mae and Freddie Mac to prevent collapse.
Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on its stake.
As a condition for the assistance, Fannie and Freddie eventually will have to reduce their holdings of mortgages and securities backed by home loans.
The portfolios “shall not exceed $850 billion as of Dec. 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion,” the Treasury said. Fannie’s portfolio was $758 billion at the end of July, and Freddie’s was $798 billion.
Officials are aiming “to prevent the mortgage market from falling apart,” said former Federal Reserve Bank of St. Louis President William Poole. The Treasury’s funds “will be flowing in for quite a long time,” Poole, a Bloomberg contributor, said on Bloomberg Radio.
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Banks and insurance companies have typically purchased the two companies’ preferred shares. The Federal Reserve and three other bank regulators said that they will work to “develop capital restoration plans” with the “limited number” of smaller institutions that hold Fannie and Freddie stock as a significant portion of their capital.
There is not enough detail on what they plan to do with shareholders. Typically they come last in line when it comes to getting money back.
This and other articles seem to imply that the government is going to treat institutional shareholders differently than individual shareholders. Reportedly the Fed, FDIC and others are going to help smaller banks with significant stock holdings in the two seized GSE’s to keep them from failing.
Paulson urged banks to contact their primary federal regulator if they believe losses on holdings of common or preferred shares in Fannie Mae or Freddie Mac will cause them to fall below the government’s benchmark for “well-capitalized” institutions.
Besides the Fed and FDIC, the Office of the Comptroller of the Currency and the Office of Thrift Supervision also signed onto today’s release.
That would just be another transfer of wealth to the rich and powerful at the expense of average citizens. It keeps the shareholders in those banks afloat at the expense of the taxpayers, even when the FDIC is supposed to be adequate protection for the depositors.
The good news is that they are both required to become a lot smaller.
William Poole former president of the Federal Reserve Bank in St. Louis says that taxpayers may pay $300 billion for this bailout.
Given that the government has consistently understated the magnitude of the mortgage/banking crisis, I suspect that is a very conservative estimate.
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