Just  a day after the bailout plan was announced, the US Treasury Department seized control of Fannie Mae and Freddie Mac, the nation's giant quasi-public mortgage finance companies, and announced a four-part rescue plan that includes an open-ended guarantee from the department to provide as much capital as required to ward of insolvency.(See: Government bail-out for US mortgage giants FannyMae and FreddyMac)

At a news conference yesterday morning, US treasury secretary Henry Paulson announced the dismissal of the two companies' CEOs and their replacement by senior finance executives Herbert M. Allison Jr. and David M Moffett. (See: Henry Paulson's statement at the end of this article)

Allison, the former head of retirement-plan manager TIAA-CREF, was named CEO of Washington-based Fannie Mae. Moffett, a Carlyle Group executive who was once vice chairman of US Bancorp, will head McLean, Virginia-based Freddie Mac. Their pay packages ''will be significantly lower than the outgoing CEOs,'' Federal Housing Finance Agency Director James Lockhart, the companies' regulator, said in a statement yesterday.

Allison and Moffett are stepping in where their predecessors failed. Fannie CEO Daniel Mudd and Freddie's Richard Syron, both hired in 2004 to help the companies recover from accounting scandals, led the firms into riskier investments, moving well beyond their public mission of housing affordability, and then failed to react quickly enough when the sub-prime-mortgage market began to deteriorate in 2007.

Fannie has lost 88 per cent of its market value since Mudd was elevated from his interim post as CEO in June 2005. The stock, which was near $60 a share at the time of his promotion, reached a closing high of $69.49 in June 2007 before beginning a freefall to $7.04 on 5 September of this year.

Freddie followed a similar pattern, starting out near $60 at the time of Syron's hiring, peaking at $73.70 in 2004, and then beginning a drop in 2007 to $5.10 three days ago. Ultimately, shareholders have lost about 91 per cent during Syron's tenure.

The Federal Housing Finance Agency will take over Fannie and Freddie under a so-called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury can purchase as much as $100 billion of a special class of stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

The two companies own or guarantee almost half of the $12 trillion in US home loans. As losses on the mortgages grew late last year, the companies recorded $14.9 billion in combined net losses, eating into their capital. Fannie has raised $14.4 billion since November and Freddie sold $6 billion of preferred securities.

Henry Paulson's statement
Below is the full text of a statement released on Sunday by Secretary of the Treasury Henry Paulson on mortgage finance companies Fannie Mae and Freddie Mac:
Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.

In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs including the ability of the GSEs to weather a variety of market conditions going forward.

As a result of this work, we have determined that it is necessary to take action. Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

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.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the US Treasury, and the Federal Reserve. We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection.

Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.

Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions.

Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other US financial institutions. I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.

I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither.

New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.

I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.

To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities.

Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders senior and subordinated and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities.

This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set.

With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.