Treasury, FHFA Outline Fannie, Freddie Rescue

The U.S. Treasury and Federal Housing Finance Agency announced Sunday a plan to temporarily take control of faltering mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), an intervention that could result in the largest federal bailout in U.S. history.

Treasury Secretary Henry Paulson and FHFA Director James Lockhart, in a press conference in Washington, outlined the federal government's plan to fund and control the public-private firms under a conservatorship agreement.

"We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection," said Paulson, who further noted that "conservatorship was the only form in which I would commit taxpayer money to the GSEs."

Business at Fannie and Freddie will open as usual Monday, said Lockhart, "only with stronger backing for the holders of MBS, senior debt and subordinated debt." The firms will be allowed to modestly increase their mortgage-backed securities portfolios through the end of 2009 in an effort to help stabilize the secondary mortgage market and lower the cost of funding.

But under the plan, approved by both firms' boards Saturday, the FHFA will take control of management and the boards. The current CEOs of the two firms will depart after a brief transition. At Fannie Mae, CEO Daniel Mudd will be replaced by Herb Allison, former vice chairman of Merrill Lynch (MER) and former chairman of TIAA-Cref. At Freddie Mac, CEO Richard Syron will be replaced by David Moffett, former vice chairman and CFO of US Bancorp (USB). Allison and Moffett's "compensation will be significantly lower than the outgoing CEOs," said Lockhart.