When Treasury Secretary Henry Paulson orchestrated the government’s historic takeover of Fannie Mae and Freddie Mac, he tapped two individual with strong finance backgrounds to head up the two government-sponsored enterprises (GSE). Herb Allison will be in charge of Fannie Mae, while David Moffett will be the top executive at Freddie Mac.
Earlier this year, Allison retired as chairman, president, and chief executive officer of pension giant TIAA-CREF, which he headed since November 2002. Allison joined TIAA-CREF after a 28-year career at Merrill Lynch & Co. where he last served as president and chief operating officer until 1999.
Allison started out at Merrill as an associate in investment banking soon after his graduation from the Stanford Graduate School of Business. Among the posts he held at Merrill was chief financial officer. After leaving Merrill in 1999, Allison served as national finance chairman for Senator John McCain’s 2000 presidential campaign.
Moffett, credited as an expert in risk management and financial analysis, retired as the vice chairman and chief financial officer of U.S. Bancorp in 2007, after having served the company in that capacity since 1993. He was responsible for all the bank’s financial management responsibilities, including corporate accounting and reporting, tax credit investments, insurance, real estate, purchasing, among other tasks.
He joined Star Banc Corp. in 1993 as CFO and played major roles as Star Banc acquired Firstar in 1998 — which in turn acquired U.S. Bancorp in February 2001, retaining the U.S. Bancorp name. Prior to 1993, Moffett held executive level positions at some of the nation’s top financial services companies, including Bank of America and Security Pacific Corp.
Lobbying group, The Financial Services Roundtable “applauded” the appointment of Allison and Moffet, and the government takeover of the GSEs in general. In a statement, the trade association noted that, “There should be a serious and thorough debate on the long-term structure and role of Fannie Mae and Freddie Mac in the future.”
“Based on what we have learned about these institutions over the last four weeks — including what we learned about their capital requirements — and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form,” said Paulson.
News of the government’s takeover of the two mortgage lenders sent the global stock markets soaring in one of their best single-day performances. Among the biggest early winners were the banks, especially the regional banks.
The big question, however, is whether this historical event signals the bottom in the housing and mortgage markets. Many experts are skeptical. For example, in a client report released on Monday, debt research group Gimme Credit wrote that, “We are not convinced the Fannie/ Freddie bailout will mark the final chapter of the credit crunch.”
Indeed, the government bailout does not make it easier for individuals who took out mortgages they couldn’t afford to suddenly be able to make their monthly payments or avoid foreclosure. It also won’t have a major impact on new potential buyers, say other experts. “We believe Sunday’s announcement ÂÂÂ will have a fairly minimal effect on current mortgage rates, and hence the present dynamics of the housing market,”JPMorgan Chase told clients Monday morning.
The investment bank’s analysts emphasized that the government’s actions will primarily stabilize the GSEs’ balance sheets and its standing in the financial markets — or, their ability to purchase mortgages on a consistent basis and borrow money, respectively. However, JP Morgan Chase conceded that ultimately, such actions should “over only the longer-term” result in a lower cost of capital for the GSEs and lower mortgage rates. “As a result, we believe mortgage credit and availability may at best only slightly improve near-term.”
Under the government’s deal, the U.S. Treasury will acquire $1 billion of preferred shares in each of the two mortgage companies without providing immediate cash, according to a statement released by the Treasury statement. Treasury also has pledged to provide as much as $200 billion to the companies, which were put under a conservatorship.
A main cash contribution trigger is the mortgage company’s assets-to-liabilities ratio. If Fannie and Freddie’s liabilities exceed their respective assets under generally accepted accounting principles, Treasury will contribute cash capital to the lenders in an amount equal to the difference between liabilities and assets. The amount will be added to the senior preferred stock held by Treasury.
The stock will be senior to all other preferred stock, common stock, and subordinated debt, as well as the mortgage-backed securities of the GSEs. Fannie and Freddie’s common stock and existing preferred shareholders will bear any losses ahead of the government, and no share buybacks will be approved, or dividends paid out, without prior consent of Treasury.
In response to the deal, Standard & Poor’s and Fitch Ratings cut the ratings on the preferred stock of Fannie and Freddie to junk status after dividends were eliminated.