Barely six months since the intervention to bail out Bear Stearns, the US government, has finally taken over the total control of the two GSEs, Fannie Mae and Freddie Mac. And handed over the reins to Herbert Allison, 65, former chief executive officer of TIAA-Cref, as Fannie’s new CEO and David Moffett, 56, who was vice chairman of US Bancorp, as Freddie’s. The financial rescue operation of two finance entities, which are nation’s largest housing finance groups, thus becomes the largest ever bailout bid by the government.
With this effort, the country hopes to allay fears of deep economic depression. The two firms, which own or guarantee almost half of the country’s $12 trillion in outstanding housing mortgage debt was severely eviscerated by increasing mortgage default as well as dampened market spirits. The GSEs were overburdened since last year when the private players fled the markets in an event of deteriorating housing crises.
As per the plan which was released by the US Treasury Secretary Henry Paulson, the treasury will immediately take a $1 billion equity stake in each company in the form of senior preferred stock and, if need be, would make available up to $100 billion to each firm. The firms will be allowed to consolidate in the short term to $850bn each, but from 2010 onwards they will have to reduce their portfolios by 10 per cent a year until they reach $250bn. Thereby, the government hopes to minimize the burden on the taxpayers in the long run, and expects to garner something in the coffers eventually. However, observers opined stabilizing the GSEs which are with $1.6 trillion outstanding debt will be an uphill task to any government.
Earlier, Paulson briefed both the presidential nominees, Barack Obama of the Democrats and John McCain of the Republicans about the government’s decision. It is understood that both nominees are pleased by the decision; however, Obama added he did not wish to have anything at the cost of tax payers.
Nevertheless, the draft has not mentioned where the money is going to come from, the real source. Paulson said the plan gave the policy makers a time out. He did not surprise anyone as he appealed to congress and ‘next’ administration to make use of this opportunity. In other words, he made the whole exercise seem like a hand cleansing ceremony of Bush administration which has only few months to complete the term.