…the government would place the two companies under
"conservatorship," a legal status akin to Chapter 11 bankruptcy. Their
boards and chief executives would be fired and a government agency, the
Federal Housing Finance Agency, would appoint new chief executives.
Instead of making a one-time cash infusion to keep the companies
[the mortgage agencies] afloat, the government will make quarterly investments, to the degree
that market conditions require. That way, in Treasury officials’ view,
investors can have confidence of a ready source of cash if the firms
need it, but taxpayers need not be put on the hook anymore than
Here is the article. Here is further analysis. Here is Brad DeLong. CalculatedRisk has lots and they note that the details on the status of the preferred stock — held by many U.S. banks — remain vague.
Overall it reminds me of how they treat misbehaving academic departments and I do not take that to be a good sign. There is no expectation that things will get better soon. The deal also seems to recognize that any one-off "solution" (e.g., a once-and-for-all recapitalization with a new and more senior class of stock) would recreate moral hazard problems and thus is unacceptable. Or is it Paulson saying he is done and he wants either Obama or Palin to have to worry about this? Or is this really about protecting the dollar rather than choosing the best institutional structure for the agencies? I believe that at least forthcoming home buyers will be better off, as Congress will not want to look responsible for higher mortgage costs.
Addendum: Here are some of the details. They are saying that preferred stock will take losses and that this won’t hurt too many banks. That would seem to represent the ascendancy of Paulson’s view over the Fed. Here is good commentary on that.
And Max says: "Here’s the real bailout. Taxpayers will now directly support the housing market." The coming series of events could end up as the biggest bailout in the history of the world.