Mounting Woes Left Officials With Little Room to Maneuver
September 8, 2008; Page A1
WASHINGTON -- In the end, Fannie Mae and Freddie Mac had no choice.
Summoned to separate meetings on Friday with Treasury Secretary Henry Paulson and other top officials, the two mortgage giants were told they could either agree to a government takeover or one would be foisted upon them.
"We have the grounds to do this on an involuntary basis, and we will go that course if needed," Mr. Paulson told senior executives at the two companies, who had little idea such a move was coming, according to three people familiar with the meetings.
There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn't survive in their present forms, and that any collapse would be devastating to the economy.
The decision was hashed out over weeks of meetings. They included a conclave of Federal Reserve officials during their annual retreat at Jackson Hole, Wyo.; a mid-August polling of bond-market players by Morgan Stanley bankers advising Treasury; and a marathon session over the Labor Day weekend, fueled in part by Diet Coke and Coke Zero.
Dozens of bankers and lawyers were involved in the process. One junior banker joked that the round-the-clock schedule was tougher than prison -- at least there, you got three square meals a day.
In the end, Mr. Paulson, Federal Reserve Chairman Ben Bernanke and James Lockhart, head of the companies' regulator, the Federal Housing Finance Agency, concluded that the two companies had lost the confidence of the markets and couldn't survive as currently structured. No one could say how much money from the Treasury, either via a loan or an equity investment, would be enough to get them through the housing mess. Hence, the need for the government to step in and stabilize what has become a vital cog for the housing and mortgage market.
This account of the government's dramatic decision is based on interviews with government, Wall Street and company officials and others.....
