Guest Author - Carol Taller
On September 7, 2008 the United States government took control over the two largest mortgage financing companies in the United States. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) were placed into conservatorship. This became one event among many during the financial upheaval from the 2008 mortgage crises.
At that time, the combined losses of the two institutions amounted to $149 billion. There was concern that their inability to raise capital could disrupt the US housing market. This was the first sign of major trouble ahead.
The United States Treasury committed to invest $200 million and extend credit into 2009 to keep both institutions operating. This bailout has been called “one of the most sweeping government interventions in private financial markets in decades.”
When the conservatorship was announced, some of the following was included in the plan of action:
- The current CEO’s of both Fannie Mae and Freddie Mac were dismissed, but would stay long enough to assist with transition.
- The Federal Housing Finance Agency (FHFA), as conservator, would assume power of the Board and Management.
- Transactions on the first day of conservatorship business would be normal, with stronger backing for holders of mortgage backed securities, senior debt, and subordinated debt.
- All political activities would be halted.
Shortly after this announcement, other financial institutions showed signs of faltering:
• Lehman Brothers filed for bankruptcy.
• Meryll Lynch accepted a buyout offer by Bank of America for $50 billion. This was about half of the valuation price one year earlier.
• Federal Reserve Bank rescued American International Group with a $85 billion secured loan facility.
Looking back, critics claimed that there were structural problems with a Government Sponsored Enterprise (GSE) such as Fannie Mae or Freddie Mac. Conflict between the government’s goals and private ownership goals could only lead to conflict.
Government required institutions keep their interest rates low and therefore increase the availability of affordable housing. Congress attained political support from GSA’s when they could hold down mortgage rates and support for affordable housing. Private ownership required these institutions to reduce risk taking and increase profitability.
Financial markets seemed satisfied with the action taken with conservatorship. Many bank investors from around the world expressed their consent.