Fannie and Freddie in Conservatorship

Hank Paulson outlined his plan to "rescue" financial markets and put Fannie and Freddie's shareholders' out of their misery. You can read the full text of his statement here. The Federal Housing Finance Agency (FHFA) has been appointed the Conservator of Fannie and Freddie. The companies will continue to function without interruption and will pay their obligations, although senior management will be ousted. The stocks will continue to trade but the powers of the stockholders will be terminated. The Treasury has entered into a Senior Preferred Stock Purchase Agreement with each GSE. Under the agreement, the Treasury will inject capital into the GSEs at any time that the FHFA determines that assets exceed liabilities according to GAAP and will inject capital in an amount equal to the difference between assets and liabilities. The agreements are indefinite in duration and have a capacity of $100 billion with each GSE and will be senior to both the common and preferred shareholders. In return for taxpayer's generosity, the Treasury will immediately receive $1 billion of senior preferred stock in the GSEs with warrants for the purchase of common stock representing 79.9% of the common stock. The new senior preferred will accrue dividends at 10% and come with a host of covenants. The covenants of most interest to current common and preferred shareholders probably pertain to the elimination of BOTH common and preferred dividends and a limit on an increase in the GSEs' debt to 110% of their debt as of June 30th 2008. This will no doubt hurt many banks that invested in the preferred stock under the assumption that the dividends were secure. Regulators are encouraging banks to contact the FDIC if their regulatory capital levels are greatly diminished due to this action. Apparently, the Fed, FDIC and OTS are going to "work" with the institutions to restore capital adequacy.
In addition to the preferred stock purchase agreement, the Treasury will also purchase MBS outright, as well as provide additional funding through collateralized loans. Interestingly, these loans will also be available to the Federal Home Loan Banks. I suppose Mr. Paulson wanted to nip any speculation about a liquidity crisis at the FHLB in the bud. So, in effect, he is killing three birds with one stone.
Mr. Paulson's plan appears comprehensive and intends to finally put an end to all of the speculation about the failures of Fannie and Freddie leading to an outright collapse of the financial markets. Will it work? That is the $5 Trillion question. More thoughts and comments to follow, but now I have to catch my flight home.