Treasury Announcements on Fannie/Freddie

Here are the official statements on the Fannie & Freddie bailouts:

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal
Housing Finance Agency Action to Protect Financial Markets and Taxpayers:

Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.

In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action. (continued after jump)

Treasury Department, September 7, 2008

Treasury Department Reports:

FHFA Director Lockhart Remarks on Housing GSE Actions
Fact Sheet: FHFA Conservatorship
Fact Sheet: Treasury Preferred Stock Purchase Agreement
Fact Sheet: Treasury MBS Purchase Program
Fact Sheet: Treasury GSE Credit Facility


Federal banking agencies issue joint release on Fannie Mae and Freddie Mac:

The federal banking agencies have
been assessing the exposures of banks and thrifts to Fannie Mae and
Freddie Mac.  The agencies believe that, while many institutions hold
common or preferred shares of these two government-sponsored
enterprises, a limited number of smaller institutions have holdings
that are significant compared to their capital.

The Federal Reserve Board, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency,
and the Office of Thrift Supervision are prepared to work with these
institutions to develop capital-restoration plans pursuant to the
capital regulations and the prompt corrective action provisions of the
Federal Deposit Insurance Corporation Improvement Act.

All institutions are reminded that investments
in preferred stock and common stock with readily determinable fair
value should be reported as available-for-sale equity security
holdings, and that any net unrealized losses on these securities are
deducted from regulatory capital.

Federal Reserve, September 7, 2008


Statement by Chairman Bernanke on Fannie Mae and Freddie Mac:

strongly endorse both the decision by FHFA Director Lockhart to place
Fannie Mae and Freddie Mac into conservatorship and the actions taken
by Treasury Secretary Paulson to ensure the financial soundness of
those two companies.  These necessary steps will help to strengthen the
U.S. housing market and promote stability in our financial markets.  I
also welcome the introduction of the Treasury’s new purchase facility
for mortgage-backed securities, which will provide critical support for
mortgage markets in this period of unusual credit-market uncertainty."

Chairman Bernanke, September 7, 2008

Treasury Statement, Continued:

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.

on what we have learned about these institutions over the last four
weeks – including what we learned about their capital requirements –
and given the condition of financial markets today, I concluded that it
would not have been in the best interest of the taxpayers for Treasury
to simply make an equity investment in these enterprises in their
current form.

The four steps we are announcing today are the
result of detailed and thorough collaboration between FHFA, the U.S.
Treasury, and the Federal Reserve.

We examined all options available, and determined
that this comprehensive and complementary set of actions best meets our
three objectives of market stability, mortgage availability and
taxpayer protection.

Throughout this process we have been in
close communication with the GSEs themselves. I have also consulted
with Members of Congress from both parties and I appreciate their
support as FHFA, the Federal Reserve and the Treasury have moved to
address this difficult issue.

Before I turn to Jim to discuss
the action he is taking today, let me make clear that these two
institutions are unique. They operate solely in the mortgage market and
are therefore more exposed than other financial institutions to the
housing correction. Their statutory capital requirements are thin and
poorly defined as compared to other institutions. Nothing about our
actions today in any way reflects a changed view of the housing
correction or of the strength of other U.S. financial institutions.

I support the Director’s decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.

I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.

I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.

To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

Treasury has taken three additional steps to complement FHFA’s decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below "well capitalized." The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.

Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today’s action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we’ve seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury’s temporary authorities in December 2009.

Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs’ business outlook.

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.

And let me make clear what today’s actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.

While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a "time out" where we have stabilized the GSEs while we decide their future role and structure.

Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the GSEs.

In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.

Treasury Department, September 7, 2008

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What's been said:

Discussions found on the web:
  1. John Borchers commented on Sep 7

    They needed to do this before the equity and preferred stock collasped.

    They are even stating that small banks hold significant portions of FNM FRE and have to write that portion down.

    They really don’t know what they are doing do they?

  2. cynicalgirl commented on Sep 7

    Cut the cr*p Paulson and Bernanke. How much will this add to our $10 trillion national debt?

  3. Mike J commented on Sep 7

    BloombergTV reporting that the Treasury’s preferred purchase will have a 10% coupon and that their warrants represent about 80% ownership.

    Paulson basically came right out and said that they are kicking the can down the road. He explicitly said that the next administration and Congress would have to decide about the GSE debt backing. What a stooge.

  4. John Borchers commented on Sep 7

    The common will be worthless Monday;

    “Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares”

    How sweet for our gov’t and nobody else. The gov’t takes risk and gets paid before anyone else.

  5. austincompany commented on Sep 7

    It was quite clear from his speech that the real concern with the GSE’s is our Japanese and Chinese masters (debt holders) – not the American shareholders. The action of the Fed and Treasury today is the DIRECT cause of the U.S. being a third-world debtor nation.

    And, as the months and years roll by, it will become even more clear that policy decisions will be made on the basis of this fact – not on wether it is beneficial to the people of the Unites States.

  6. karen commented on Sep 7

    Did I fail to see, after reading it twice, mention of the dividend? I’m left almost speechless, because it does seem as the previous poster queried, They don’t really know what they are doing, do they?

    As an aside, on Thursday I left a comment on Financial Ninja.

    “BTW, I’m still holding my SRS and SKF but not happily. All I can figure is that those ETFs see a bailout in the future… or they are just consolidating. That said, I can see TOL going down in a ball of flames… dumbest CEO ever. That billion dollar cushion he keeps bragging about is a credit line! I bet TOL’s bank wants that back…

    September 4, 2008 2:05 PM”

    As Leftback and others also noted, those etfs weren’t acting in sync with the markets last week. So on Friday, I sold all my SRS but bot back a small position at the close. Perhaps, foolishly, I also added to my SKF.

    Now we see what Monday brings. Nothing would surprise me in the short term…

  7. Rich Shinnick commented on Sep 7

    This is one of those situations where I have so much to say and am so angry that I realize that I would probably run in to word limits on this blog.

    So suffice it to say that I will just agree with the 150 comments that will follow my post by people who are equally upset and realize what a complete and utter failure of government this represents both in preventing the crisis and in responding to it…enough said.

  8. BG commented on Sep 7

    Well…I don’t know what to think; but, I am getting a knot in my stomach and a sinking feeling in my gut.

    We are seeing the wealth of this Country dissolve before our very eyes. It started years ago with shipping all of the good and decent jobs of the Middle Class to lower cost regions of the World in exchange for EASY profits while turning our backs on innovation, invention & American ingenuity that was once the marvel of the World. By doing so, we cheated all of the men and women of this Country from the past who gave their lives and blood as well as those yet to be born in the future. The saddest thing of all is that we had a tremendous lead on the rest of the world that we just pissed away.

    We can no longer give a straight answer on anything; but must resort to spinning the answer with deception.

    Now, here we sit as a hollowed-out, whored-out Country who no longer has the backbone or ethic to do the RIGHT thing and just continue to do the EASY thing until the whole damn thing comes crashing down.

    Lastly, you got to know that HANK (I just love saying that) Paulson is counting the number of days left before he too can run for the hills and take the EASY way out!!

    My immediate recommendation: Get a Carry Permit. Crime here is going straight up and is going to get a lot worse in the future. Just one of thousands of unforeseen side-effects of a decaying economy.

  9. Billy commented on Sep 7


    You and I need to talk. It looks like we have the same ideas. I too held on to my SKF, as well as my SRS. Remember, the SRS is commercial real estate – not residential.

    I think I will not play the catch up game. SKF is comin back. No?


  10. Justin Morton commented on Sep 7

    How does Jim Lockhart still have his job? What’s he been doing the last few years? Wasn’t he supposed to be preventing just this type of crisis?

  11. txchick57 commented on Sep 7

    SKF not in sync with the market? LOL, really? Almost a 100 point divergence!


  12. Jim Haygood commented on Sep 7

    From the Bloomberg article:

    “The Treasury briefed Democratic presidential candidate Barack Obama yesterday and has contacted Republican contender John McCain’s staff. Officials also discussed the plans with House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid, Senate Banking Committee Chairman Christopher Dodd and House Financial Services Committee Chairman Barney Frank.”

    So this is what “democracy” has devolved into. Instead of public debate on the Congressional floor, we now have rule by decree. Congressional “leaders” are briefed in private, off-the-record conversations.

    Your typical foot-soldier, grunt KongressKlown has no more clue than you or I as to what deliberations took place to produce this result.

    Welcome to our nuclear-armed banana republic. America number one! Buy now, before prices go up! Mwa hahahaha ha …

  13. devalera commented on Sep 7

    I don’t know for sure folks, but it appears that many of you don’t understand this situation.

    First off, the government getting a “good deal” means taxpayers are getting a good deal…that’s good folks, not bad. Something had to be done and crushing the common and preferred but supporting the senior and sub-debt is probably the right baby-cutting move.

    If a move like this wasn’t made and the mortgage slide given some plateau to halt upon then your fears of increasing crime and worsening conditions would be founded.

    Ceteris paribus, this is actually a pretty good move given the circumstances. Even if you don’t understand it you’ll see the light in a few years when we look back on this dark time from a sunnier perspective.

    Ackman and others like him understand this and don’t like it because it kills their shorts in the sub-debt holders. What audacity, proposing his own solution for how taxpayer money is deployed in support of his investments.

  14. Mitchn commented on Sep 7

    Paulson is a liar.

    > 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.

    Not a word about the primary objective: protecting debt holders (China, Japan, PIMCO).

    > Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

    Utter BS. Paulson, Bernanke, Frank, Dodd et al knew this was coming when Paulson asked for, and Congress signed off on, the blank check a month ago. The only surprise is how quickly Hank and friends moved to cash it. Was that because of Gross? The Chinese? The specter of the Dow falling below 10,000? All of the above?

    Another thing: Lockhart should be fired and Frank and Dodd need to be replaced. Most of the damage happened on the Republicans’ watch, but Barney and Chris have done nothing to make the situation better over the last 12 months.

    Don’t worry: Sarah Barracuda stands ready to throw the corrupt old boys out of the people’s temple. Lol.

  15. Spectreman commented on Sep 7

    IF the market decides that it doesn’t like this bailout, then what?

    What other policy actions are available? This was the bazooka wasn’t it…do we have to bring out “the bomb”, which leads the M.A.D (mutually assured destruction).

    I don’t want to be negative here, but it is tough to find a silver lining that points to this being more than just a band-aid on a severed limb.

  16. Read: Ben Franklin commented on Sep 7

    The latest beige book speaks for itself.

    Market is still a poor value and in the end,
    it’s STILL a weighing machine.


  17. Billy commented on Sep 7

    “SKF not in sync with the market? LOL, really? Almost a 100 point divergence!”

    Yeah, ok one month does not a market make!

    What about the run up to 200. A guarantee we won’t see 50% of that again. This “take-over” is not happening in a bubble. It is part of a systemic development that started years ago, and has many more years to play itself out.

  18. Winston Munn commented on Sep 7

    This could have been said in a more simple manner.

    1. Noboby, but nobody wants to buy mortgage backed securities.

    2. Somebody has to buy them, though, or the jig is up.

    3. Due to #1 and #2 above, the U.S. Taxpayer will now be the “buyer” of last resort.

  19. James Altucher commented on Sep 7

    A couple of comments:

    A) FNM + FRE will definitely open down (as suggested above). Maybe down as much as 80% from Friday’s close because of the 80% dilution. HOWEVER, in one of those market quirks that like to confound pundits, I bet FNM and FRE end the week (or month) higher than Friday’s close. The common is down because the market is pricing in bankruptcy, which isn’t going to happen. So I bet there will be buyers after the initial pause in buying on Monday.

    B) The beige book is not relevant to the market’s “value” as suggested by a comment above. Look at the past times the unmeployment rate ticked higher than 6% since WWII. I did this study:

    Buying the market (the Dow) every time the unemployment rate hits 6% and selling six months later had the following result:

    42 occurrences since World War II, 33 successes (80%), with an average return of 6.57% during the six-month period.

    Is this statistically signifcant? Randomly buying and holding for six months results in only a 3% return with only 64% success. So yes, an unemployment rate above 6%, for whatever reason, is statistically significantly bullish over the six months that follow. The results were also very good over one-month, three-month, and 12-month periods.

  20. Gobbleknoll commented on Sep 7

    4. The US taxpayer has been telling everyone for years that agency debt was “implicitly guaranteed”.

    5. Clarification was requested a few weeks back by Asian bankers.

    6. The US taxpayer must now explicitly stand behind the debt that bond buyers always assumed he stood behind anyway.

    7. So what?

  21. Spectreman commented on Sep 7

    So we are supposed to be excited about the prospects for a 6% return over the next six months?

    Given the risks in the marketplace, and the warning signs in the credit markets, I will sit on the sidelines for this one.

  22. shalagarsamy commented on Sep 7

    “Fannie and Freddie will increase their mortgage-backed securities portfolios through the end of 2009. (Treasury is initiating a temporary program to purchase GSE MBS)”

    Does this mean that the big banks will have a chance to dump all their pre-existing toxic waste onto Fannie and Freddie’s books for the next 18 months? Or is this for newly minted MBS that has to ferment for a while?

  23. Zouzou commented on Sep 7


    Let’s be optimistic here. While all present and future US taxpayers will shoulder the x% loss on the mortgage lenders’ 6 trillion of obligations, every single one of us investors can profit big time.

    Short the VIX- the only reliable indicator to signal that sth was in the bushes; a no-brainer trade. Also early on short Illinois-based Midwest Bank Holdings, Philadelphia-based Sovereign Bancorp, and Washington-based Frontier Financial Corp., each bolstered by regulators’ allowance to hold FNM and FRE preferred stock as “assets” [refer to You will be certain to exploit lead-lag effects with these small cap stocks.

    Harder to predict what o/n volatility in WM will be, though the sisters have been taken into custody upon the biggest surge in mortgage defaults in at least three decades. That bullride is over, but let’s feast on WM.

    And yes, our Asian lords are throwing a party.

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