Treasury Deal Close For Fannie And Freddie

The Treasury is putting the final touches on a plan that would essentially mean the government is taking over troubled mortgage giants Fannie Mae and Freddie Mac, market sources were reporting on Friday. An announcement of the deal could come as early as this weekend, according to the WSJ. On Friday afternoon, Treasury Secretary Henry Paulson met with Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac. Also attending the meeting were Federal Reserve Board chairman Ben Bernanke and James Lockhart, chief of the Federal Housing Finance Agency.

While details have not been announced, the plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, along with a government injection of capital.

"Once the Treasury won congressional approval to take over the GSE's, the move became inevitable," said Matthew Carniol, chief currency strategist at TheLFB-forex.com. "Fannie and Freddie were unable to sell new issues of common or preferred stock because investors feared the shares could lose value when the government acted." The companies were recently able to sell new debt issues at premiums well above Treasuries because the government basically back-stopped the debt.

It also appears that big firms such as Pacific Investment Management Company (PIMCO) will be making sizeable investments once the Treasury's plan is implimented. Bill Gross, chief investment officer of PIMCO, said in an interview Friday he believes private investors would buy new shares in Fannie and Freddie only if the Treasury acts first to bolster their capital. "Investors are saying, 'We want to see the Treasury in there with us,'" Mr. Gross said. The Treasury will have to "swim in the pool, not just be a lifeguard," he added.

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