WASHINGTON (Reuters) - The boards of mortgage finance companies Fannie Mae and Freddie Mac were set to meet on Saturday to discuss a government plan to place the companies under federal control, sources said.
The U.S. Treasury Department plan to put the two government sponsored enterprises, which own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt, into federal conservatorship could amount to the largest financial bailout in the nation’s history.
Freddie Mac’s board was expected to meet by phone today and receive a briefing on the Treasury’s plan, two sources familiar with the board meeting said.
Another source said Fannie Mae’s board had been asked to come to Washington for a meeting on Saturday where the company’s chief executive, Daniel Mudd, was expected to brief them on the plan, which could be announced this weekend.
The planned intervention reflects concerns among U.S. officials that financial markets had begun to lose confidence in the two companies after they reported losses for the past four quarters, due to the worst slump in the U.S. housing market since the Depression of the 1930s.
Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and Federal Housing Finance Agency Director James Lockhart, the companies’ regulator, met separately on Friday with Mudd and Freddie Mac CEO Richard Syron.
Both the Fed and Treasury have declined to comment on the conservatorship plan, which maps out in detail the manner in which the government will take a large financial stake in the companies.
An emergency plan approved by Congress in late July gave the Treasury the authority to offer an undetermined amount of credit to the companies, or take an equity stake in them if they ran into trouble. Housing legislation signed into law by President George W. Bush in July requires them to agree to a Treasury backstop.
Massachusetts Democratic Rep. Barney Frank, chairman of the House of Representatives Financial Services Committee, said in a statement on Saturday that Paulson had told him on Friday Treasury planned to use its new authority “to ensure the continued and stable functioning” of the companies.
“I am pleased by the secretary’s strong reaffirmation that the vital roles these institutions play in our nation’s housing markets must continue,” he said.
A report in the Washington Post said 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.
Separately, the New York Times said 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 Wall Street Journal earlier reported that a bailout plan could be announced as early as this weekend.
On Friday, the Treasury said it was “making progress on our work” with Morgan Stanley, the Fed and the companies regulator. The 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 them.
“These entities are so big and they’re so tied into the housing market that it’s probably true that we have to take steps to make sure they dont just collapse,” Democratic presidential nominee Barack Obama said at a rally in Terre Haute, Indiana. “Because the housing market, which is already weakened, would be in even worse shape it we didn’t take some steps.”
Paulson called Obama on Friday night to brief the Democratic candidate and Obama discussed the situation on Saturday with his economic advisers, including former Fed Chairman Paul Volcker, a campaign official said.
Separately, an economic adviser to Republican presidential hopeful Sen. John McCain said Paulson had briefed McCain on the situation over the phone on Saturday morning.
The adviser, Douglas Holtz-Eakin, said the Arizona senator would support a short-term solution that would keep any trouble at the two companies from spreading further to financial markets. “Over the long haul he believes we should downsize and privatize them so that they’re not a risk to the American taxpayer,” he said.
Shares of the two government-sponsored enterprises have plunged about 80 percent since mid-May this year. Soaring mortgage defaults led the companies to report about $14 billion in losses in the past four quarters, eroding their capital.
Financial markets have come to expect that an investment by the U.S. Treasury would explicitly back the companies’ $1.6 trillion in debt, but leave their shares nearly valueless.
Instead of giving each company a big capital infusion up front, the government plans to make quarterly infusions as the companies’ losses warrant, the Washington Post reported. This would be an attempt to minimize the initial cost of the rescue, the paper said.
Analysts at Citigroup, Merrill Lynch, and Goldman Sachs since mid-August have issued reports saying the companies had plenty of capital to operate for the near term, and both companies have successfully rolled over debt on schedule in the meantime.
However, the major credit rating companies since August 22 all cut their ratings on preferred stock of the two GSEs on expectations that the share price declines had cut access to capital, increasing the need for emergency financial support.
The companies never lost their access to capital markets where they raise money to support the U.S. housing market, but the biggest buyers of the debt have grown more cautious.
Foreign central banks reduced their holdings of “federal agency” debt in custody at the Federal Reserve in the past week for the seventh week in a row, suggesting a growing aversion to the debt.
Additional reporting by Deborah Charles in Terre Haute, Indiana, Jeff Mason in Colorado Springs, and John Poirier, Mark Felsenthal, David Lawder and Glenn Somerville in Washington; writing by Tim Ahmann