Many woes, not single failing, pushed GSE takeover

By Patrick Rucker and David Lawder

WASHINGTON (Reuters) - The U.S. Treasury decided to seize control of Fannie Mae and Freddie Mac after concluding that the companies could not sustain mounting mortgage losses and still offer critical aid to the broader housing markets, said sources familiar with the move.

The Treasury found no smoking gun to indict the companies and there was no single failing that prompted the takeover, the sources said.

Rather, Treasury Secretary Henry Paulson's outlook darkened over weeks of internal debate, briefings from outside consultants and meetings with the government-sponsored enterprises' (GSE) main regulator.

Specifically, Paulson worried that Fannie Mae and Freddie Mac did not have enough capital to withstand mounting credit losses and that Wall Street would continue to shun their stock, making it impossible to raise new equity capital.

Without investor cash, Fannie Mae and Freddie Mac would have to raise the costs of their mortgages and shrink their balance sheets just as policy-makers were relying on the companies to keep home buying costs low.

RESPONSIBILITY WITHOUT POWER

While Paulson and a handful of other officials formed the government's brain trust on GSE policy, the Treasury lacked the authority to seize Fannie Mae and Freddie Mac in an orderly way.

The Treasury could take an equity stake in either company under a rescue plan conceived by Paulson in July, but only after executives agreed to such a move.