Secretary of the Treasury Henry Paulson announced over the weekend that Fannie Mae and Freddie Mac are being placed into conservatorship. The government is injecting capital into the entities and assuming responsibility for the senior debt. It also receiving warrants in both entities. The status of the common and preferred shareholders is tenuous, and it is highly unlikely that they will receive much in the end.
The equity markets have received this news with euphoria and are up substantially across the board. Everyone appears to be hoping that this move breaks the logjam that is currently affecting the credit markets. They are also anticipating that this move will help to stabilize the housing market.
I believe that this move will accomplish both of these objectives in the short term. The current situation could not continue without a potential financial meltdown occurring. In essence, the government had no choice but to take these steps. One can argue over the exact details but not over the actual move itself.
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