The Fannie and Freddie Take Over

John Hempton at Bronte Capital has an excellent summary of the takeover of Fannie and Freddie. It’s odd to say this, but the markets forced the government’s hand. The WSJ looks at the events leading up to the takeover.

In the end, Fannie Mae and Freddie Mac had no choice.
Summoned to separate meetings on Friday with Treasury Secretary Henry Paulson and other top officials, the two mortgage giants were told they could either agree to a government takeover or one would be foisted upon them.
“We have the grounds to do this on an involuntary basis, and we will go that course if needed,” Mr. Paulson told senior executives at the two companies, who had little idea such a move was coming, according to three people familiar with the meetings.
There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn’t survive in their present forms, and that any collapse would be devastating to the economy.
The decision was hashed out over weeks of meetings. They included a conclave of Federal Reserve officials during their annual retreat at Jackson Hole, Wyo.; a mid-August polling of bond-market players by Morgan Stanley bankers advising Treasury; and a marathon session over the Labor Day weekend, fueled in part by Diet Coke and Coke Zero.
Dozens of bankers and lawyers were involved in the process. One junior banker joked that the round-the-clock schedule was tougher than prison — at least there, you got three square meals a day.
In the end, Mr. Paulson, Federal Reserve Chairman Ben Bernanke and James Lockhart, head of the companies’ regulator, the Federal Housing Finance Agency, concluded that the two companies had lost the confidence of the markets and couldn’t survive as currently structured. No one could say how much money from the Treasury, either via a loan or an equity investment, would be enough to get them through the housing mess. Hence, the need for the government to step in and stabilize what has become a vital cog for the housing and mortgage market.

I’m not against the government’s move and I see that it had to happen. Don’t believe any of the nonsense that this will “cost the taxpayer” fill-in-the-blank billions of the dollars. It won’t at all. What the companies needed as much as money is time and that’s what the government has given them.
This is sorta of like sausage-making. I only care about the end result and I’d rather not know how it happens. My problem is that the takeover should (must!) lead to full privatization. This can’t be a trip to the repair shop because the problem will happen again. That’s not a prediction. It will happen again.

Posted by on September 8th, 2008 at 11:01 am


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