U.S. to take control of Fannie and Freddie: reports

By Glenn Somerville and Al Yoon

WASHINGTON/NEW YORK (Reuters) - The U.S. government plans to put government sponsored mortgage finance companies Fannie Mae and Freddie Mac under federal control, the New York Times and Washington Post newspapers reported late Friday, in what could be the largest financial bailout in the nation's history.

The two government sponsored enterprises (GSEs) own or guarantee almost half of the country's $12 trillion in outstanding home mortgage debt.

The Wall Street Journal reported earlier on Friday that the U.S. Treasury Department is close to finalizing a plan to restructure the two companies that includes changes to their senior management.

The plan could be announced as early as this weekend, the Journal said.

U.S. Treasury spokeswoman Brookly McLaughlin declined to comment on the Journal report on Friday. Fannie Mae and Freddie Mac spokesmen also declined to comment. The Federal Reserve, which earlier this year gave both companies the right to borrow from its discount window if necessary, declined comment also.

The two firms would be placed in "conservatorship", the Washington Post said, citing sources familiar with the discussions.

The value of the company's common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares, would be protected by the government, the Washington Post said.

Senior Bush administration and Federal Reserve officials called in top executives of Fannie Mae and Freddie Mac on Friday and told them that the government was preparing to place the two companies under federal control, officials and company executives told the New York Times.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson were present at meetings with James Lockhart, the director of the Federal Housing Finance Agency, the regulator of the two companies, and with Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron on Friday, Reuters can confirm. There were separate meetings with the two CEOs.

The executives were told they and their boards would be replaced and shareholders value diluted, but the companies would be able to continue functioning with the government generally standing behind their debt, the New York Times said.

Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts eventually, the Wall Street Journal reported.

Earlier, McLaughlin had told Reuters the department was "making progress on our work" with Morgan Stanley, the Federal Housing Finance Agency, and the U.S. Federal Reserve.

The U.S. Treasury had hired Morgan Stanley on August 5 to advise it on whether the companies were adequately capitalized and help it determine how it would use its new powers to support the GSEs.

An emergency plan approved by Congress in late July gave Treasury the authority to offer an undetermined amount of credit to the two companies, or take an equity stake in them if they ran into trouble. The housing legislation signed into law by President George W. Bush in July requires the companies agree to a Treasury backstop.

Shares of the two government sponsored enterprises (GSEs)have plunged about 80 percent since mid-May this year as the U.S. housing market slump resulted in the two companies reporting about $14 billion in losses in the past four quarters, eroding some of their capital.