What did the government do? They replaced the leadership of these two organizations: Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac. The hope is that the rest of the staff will remain in place, and Fannie's Daniel Mudd and Freddie's Richard Syron, the former leaders of each organization, have agreed to stay on during the transition.
The government is going to buy $5 billion in mortgage-backed securities held by Fannie and Freddie. This will provide more capital for each organization. The Treasury Department said it will immediately be issued $1 billion in senior preferred stock from each company, but eventually the Treasury could be required to put up as much as $100 billion for each organization over time if the funds are needed to keep the companies afloat. This infusion guarantees that each organization will remain solvent, assuring that financing for real estate purchases will not be thrown into chaos. The government also will receive warrants representing ownership stakes of 79.9 percent in each firm. The existing stockholders will be subordinate to this obligation to pay the federal government, so the $36 billion in outstanding stock for these companies just moved down a notch to be in second position to the federal government. This puts those shares in the position of junk bonds, according to Standard and Poor's ratings.
