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The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives and prop them up financially, federal officials told the two companies yesterday, according to three sources familiar with the conversations.
Under the plan, which could prompt one of the most sweeping government interventions in the workings of financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies' common stock would be diluted but not wiped out; while the holdings of other securities, including company debt and preferred shares might be protected by the government.
Paulson and the administration came in for heavy criticism for seeking financial backup authority. Critics charged that the administration was, in a widely used phrase, "socializing the companies' losses and privatizing their gains."
That's because the chief beneficiaries of the new authority appeared to be the companies' investors, who saw the steep decline in the price of their shares level off with Washington effectively promising to assume risks of loss they had previously borne.
