Freddie & Fannie: the walking dead

The rumors have crystalized. If you're a Freddie Mac or Fannie Mae invstor - Sunday is going to suck.

The NYT is reporting:

Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history. 

Looks like the home loan market is about to go into a vise.

I was listening to NPR on Wednesday and David Wessel was laying out a similar scenario. At the time, I though he sounded like a crazy man - i.e. another of those "This is what should happen, but it will never happen."

Well, it's happening. And (small justice) heads are rolling:

Officials said the participants at the meetings included Mr. Paulson, Ben S. Bernanke, the chairman of the Fed, and James Lockhart, the head of both the old and new agency that regulates the companies. The companies were represented by Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac. Also participating was H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell, who was representing Fannie.

Officials and executives briefed on the meetings said that Mr. Mudd and Mr. Syron were told that they would have to leave the companies.

 How bad is it?

After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50, down from $70 a year ago. Freddie was trading at about $4, down from about $65 a year ago.

With Fannie and Freddie guaranteeing $5 trillion in mortgage-backed securities, and a big share of those held by central banks and investors around the world, Mr. Paulson appears to have decided that the stakes are too high to take chances. 

Why act now?

Here's a priceless answer from Columbia Business School professor Charles Calomiris:

“The last thing you want to do is give a distressed borrower more time, because when people are in distress they tend to take a lot of risks,” he said. “You don’t want zombie institutions floating around with time on their hands.”

 Brains... Brains!!!

The aim of all this is to avoid the true nightmare scenario - Freddie and Fannie imploding and taking 5 trillion dollars with them. It's still plenty bad- and anyone with below average credit can expect a cold reception from lenders in the foreseeable future.

Jeezus.

Late edit:
WaPo adds some more detail:

Placing the companies in conservatorship, rather than receivership, could signal that the government does not intend to nationalize or liquidate Fannie Mae and Freddie Mac. Instead, under the terms of a federal law passed this summer, conservatorship is designed to allow the government to restructure the companies and return them to private control. Treasury officials have previously compared the process to Chapter 11 bankruptcy.