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Treasury Secretary Henry Paulson announced plans Sunday to take control of troubled mortgage giants Fannie Mae and Freddie Mac, replace the companies’ chief executives and provide up to $200 billion in capital to restore the firms to financial health. The Treasury’s plan puts the two companies under a conservatorship, giving management control to their regulator, the Federal Housing Finance Agency, or FHFA. In return for agreeing to provide as much equity capital as needed later to cover losses stemming from mortgage defaults, the Treasury gets $1 billion of preferred stock in each company without providing any immediate cash.

With that, the U.S. mortgage crisis entered a new and uncharted phase, potentially saddling American taxpayers with billions of dollars in losses from home loans made by the private sector. Bush administration officials, backed cautiously by legislators on both sides of the aisle, argued that the cost of doing nothing would be far greater because of the toll on the economy of falling home prices and defaults in the $11 trillion U.S. mortgage market.

Mr. Paulson noted that more than $5 trillion of debt and mortgage-backed securities issued by Fannie and Freddie is owned by central banks and other investors world-wide. “Failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” Mr. Paulson said.

By taking this action, the government has seized control of the vast bulk of the secondary market for home mortgages, where these loans are sold to investors, and will have a more direct responsibility than ever for solving the housing crisis. The intervention also marks the failure of the public-private experiment that was created to boost home ownership among Americans. Though Fannie and Freddie were created by Congress to help prop up the housing market, they have long been owned by private shareholders seeking to maximize profits.

The federal takeover of mortgage giants was initially welcomed by banks and market watchers outside the U.S. as a way to dispel some of the uncertainty roiling the world’s financial markets. The intervention could eventually be a boon for Wall Street, by providing a boost to the moribund mortgage industry and by perhaps diminishing the influence of Wall Street’s two largest competitors in the market packaging and reselling mortgage-backed bonds.

The move is also likely to nudge down interest rates for consumers and help prevent a deepening of what is already the worst housing bust since the 1930s. Despite steep interest-rate cuts by the Federal Reserve, the cost of a typical 30-year fixed-rate mortgage has remained well over 6% for most of the past year. To bolster the mortgage market, Treasury said it will buy, on the open market, at least $5 billion of new mortgage-backed securities issued by Fannie and Freddie.

The government rescue of Fannie and Freddie is likely to leave a trail of billions in losses for stock holders, including some major banks. But it protects the investments of bondholders, including mutual funds, foreign central banks and government investment funds that own large amount debt issued by the two companies. Investors such as Pacific Investment Management Co., the large Newport Beach, Calif., bond manager, that have loaded up recently on mortgage-backed bonds could benefit as Treasury purchases of such securities drive up their values.

It is unclear how much the government’s intervention will ultimately cost taxpayers. In exchange for agreeing to provide as much capital as needed to the companies as they cope with heavy losses on mortgage defaults, the Treasury will acquire $1 billion of preferred shares in each company. It has obtained warrants that give it the right to a stake of 79.9% for a nominal sum. The Treasury’s preferred shares will be senior to those earlier issued, meaning the government will have the first right to receive dividends.

The new overseers will also eliminate dividends on billions of common and preferred stock, moves that are expected to drive down the price of those shares, which have already dropped precipitously this year. The issue of additional preferred shares will dilute common shares.

“The common shareholders seem to be in worse shape than they were on Friday,” said Robert Napoli, an analyst at the securities firm Piper Jaffray in Chicago. “The preferred shareholders have much more hope of retaining significant value over the long run.”

Andrew Brenner, a senior vice president at MF Global Inc., a brokerage firm, said Fannie and Freddie common shares are likely to fall 50% to 75% in light of the government moves and preferred shares could fall about 30%.

That prospect is especially disturbing for some commercial banks and thrifts, which are among the biggest holders of Fannie and Freddie preferred stock. The Office of Thrift Supervision, a government agency that supervises savings and loans, said that roughly 2% of the 829 companies it regulates had a concentration in common or preferred shares of Fannie Mae and Freddie Mac that surpassed 10% of their Tier 1 capital. Regulators said Sunday they would work with banks that hold large exposures to Fannie Mae and Freddie Mac “to develop capital-restoration plans” if necessary.

The Treasury’s move doesn’t answer what could be the $5 trillion question of what ultimately happens to Fannie and Freddie. Under the conservatorship of their regulator, the companies will still have their shares listed on the New York Stock Exchange, but management control goes to the regulator until it deems the companies financially healthy. Congress ultimately will have to decide in what form Fannie and Freddie will be relaunched or whether they will be replaced by different types of entities.

The Treasury plan limits the size of each company’s mortgage portfolios to a maximum of $850 billion as of the end of 2009. After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company.

Wrangling over the future shape of Freddie and Fannie will likely be kicked to the next Congress. Already the majority Democrats are pushing back on elements of Treasury’s plan. “Good luck on that,” said Massachusetts Rep. Barney Frank, chairman of the House Financial Services committee, when asked about the Treasury’s plan to start reducing the firms’ portfolios beginning in 2010. Mr. Frank called it a “more of a sop to the right” than a real policy prescription and said it wasn’t going to happen.

Many economists and analysts believe the government had to wade deeper into the mortgage market because for now “private markets are just not willing to put up the capital” for home mortgages at prices U.S. consumers could afford, said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School. Without government support for the mortgage market, home prices would fall much farther, exposing the country as a whole to greater economic strain, Ms. Wachter says.

The stunning turn of events for Fannie and Freddie are remarkable considering the two companies for so long shunned the riskiest type of mortgages, only to embrace those mortgages late in the game in an effort to regain market share from Wall Street rivals.

As early as 2005, Fannie executives publicly expressed concerns about growing risks in the mortgage market. In May of that year, Thomas Lund, a Fannie Mae executive vice president, said that lenders should be concerned if borrowers straining to afford homes were given loans allowing for low payments in the early years but storing up much higher ones for later. “In many cases the consumers may not understand all the risks,” he said.

Yet both companies expanded their exposure to riskier loans. At both Fannie and Freddie, so-called Alt-A loans, a category between prime and subprime, accounted for roughly 50% of credit losses in the second quarter, even though such loans accounted for only about 10% of the companies’ business. Alt-A mortgages include loans made with less than full documentation of borrowers’ income or assets.

“Business they thought was prime is turning out not to be prime because of limited documentation of income and declining home prices,” said Guy Cecala, publisher of Inside Mortgage Finance.

As these and other loans — including many in areas such as California and Florida that are among the hardest hit by the housing crisis — started to go bad, the companies made a series of missteps. They failed to raise enough capital late last year, when investors were still fairly bullish on their prospects, to see them through the current storm. The companies have recorded combined losses totaling about $14 billion over the past four quarters, eating deeply into their meager capital holdings. Most analysts expect them to report sizable losses for at least another couple of years as the costs of foreclosures mount.

Fannie and Freddie’s credit problems are largely a reflection of the overall weakness in the housing market. Some 9.2% of mortgages on one-to-four family homes were at least a month overdue or in the foreclosure process in the second quarter, according to the latest survey of the Mortgage Bankers Association. That is the highest percentage in the 39 years that the trade group has been doing the surveys.

“Make no mistake, anybody in the mortgage business is going to see much higher losses than they thought they would a year ago because we’ve had the worst housing market and the largest home price declines that anybody has seen,” said Thomas Lawler, a housing economist in Leesburg, Va., who formerly worked for Fannie.

Both companies are also heavily exposed to some of the mortgage industry’s most troubled players. Countrywide Financial Corp., now part of Bank of America Corp., was the largest provider of loans purchased by Fannie Mae, accounting for 29% of its business in 2007, according to Inside Mortgage Finance, and was the second largest source of loans for Freddie Mac, with a 16% share.

At Fannie, Herb Allison, who formerly served as chairman of the investment company TIAA-CREF, succeeds Daniel Mudd. Freddie’s chief executive, Richard Syron, was replaced by David Moffett, who has been vice chairman and chief financial officer of US Bancorp.

Mr. Syron may walk away with an exit package that could total as much as $15 million, says David Schmidt, a senior consultant at James F. Reda & Associates LLC, a compensation consulting concern in New York. That includes a pension and deferred compensation, about $3.7 million in severance pay and a possible payment of $8.8 million to compensate for forfeiting recent equity grants.

The plane was carrying Colombian drugs for the fugitive leader of Mexico’s Sinaloa cartel, Joaquin “Chapo” Guzman, when it crash-landed in the Yucatan peninsula on September 24, El Universal reported.

The daily said it had obtained documents from the United States and the European Parliament which “show that that plane flew several times to Guantanamo, Cuba, presumably to transfer terrorism suspects.”

It said the European Parliament was investigating the private Grumman Gulfstream II, registered by the European Organization for the Safety of Air Navigation, for suspected use in CIA “rendition” flights in which prisoners are covertly transferred to a third country or US-run detention centers.

It also said the US Federal Aviation Administration’s (FAA) logbook registered that the plane had traveled between US territory and the US military base in Guantanamo.

It said the FAA registered its last owner as Clyde O’Connor in Pompano Beach, Florida.

The ancient ziggurats were towers of receding stories with a temple at the top (better for the priests, apparently, to escape rising flood waters). Timelinks envisions its Ziggurat to be a carbon-neutral city of as many as a million people living in 2.3 square kilometres where cars aren’t allowed. Much like a pyramid-shaped Masdar. The prototype will be exhibited at Cityscape Dubai, a business real estate convention in October.

Dear Kenny,

We send you our heartfelt thanks and the thanks of a grateful Nation for your selfless efforts in responding to the tragic events of Sept. 11. Your actions in the midst of this national tragedy were truly heroic. Your saving a man who was on fire by dragging him out of an elevator and getting him to an ambulance reflected the best of the American spirit.

Sincerely,

George Bush

Laura Bush

Johannemann was a part-time janitor assigned to clean rest rooms in the north tower on 9/11 and was, indeed, credited with saving a man.

His family says that day changed him, that he became withdrawn and began drinking heavily, falling in and out of work.

Twelve days before the seventh anniversary of the day he saved a life, Johannemann took his own.

The police then vouchered another letter, the suicide note the 43-year-old wrote on Sunday afternoon, shortly before the 5 p.m. deadline his landlord had set for him to vacate for nonpayment of rent.

“The reason I killed myself was ’cause I was getting evicted and I can’t handle being homeless. I also am very depressed since I was in 9/11. I’ve been drinking way too much and it’s ruined my life. I’ve lost friends and family over drinking and I’m very lonely. There is nothing left for me to be happy about other than my cat. Sounds weird, but it’s true. I just wanted to say sorry 2 any people I ever hurt in my life. I really was a good person when I wasn’t drinking. I hope people remember that!

Goodbye!!!

Kenny Johannemann”

On a separate sheet was a plea: “Please find my cat a home. His name is Papa-Boy and he’s a very special cat.”

The police brought Papa-Boy to the 122nd Precinct stationhouse on Staten Island. The tabby was trembling when one of Johannemann’s cousins, Gerald Maya, picked him up. Maya also collected Johannemann’s cell phone. He dialed every number in it to pass on the tragic news.

“Everybody I called on his cell phone said, ‘I would have given him the money. The guy was beautiful.'” Maya said Wednesday. “Nothing bad on this man.”

Maya had offered Johannemann a place to stay, as had another cousin who lived nearby. Johannemann had declined.

“I really can’t tell you why,” Maya said.

The other cousin, Joseph Maya, spoke of the Johannemann before 9/11; a man who seemed content in his work and who delighted in his extended family.

“He had a job and he was happy,” Joseph Maya said.

Johannemann often said he might have been killed on 9/11 had he not stopped to get a cup of coffee just before the plane hit.

Otherwise, he might have been on an elevator when a jet crashed and flaming fuel poured down the shaft.

Instead, he was waiting for an elevator when he heard a huge bang and the doors burst open. A man tumbled out on fire and Johannemann helped him to an ambulance.

“He was burned up bad but he was still alive,” Johannemann told People magazine.

In the aftermath, Johannemann appeared on the “Jenny Jones Show” and received the letter from the White House. Privately, the hero became a reclusive alcoholic.

“He just started backing away and not bothering with anyone,” Joseph Maya recalled.

He avoided family, even on the holidays he had always loved. He seemed convinced he was friendless and alone.

“He said he had nobody, but meanwhile everybody loved him,” Joseph Maya said.

In May, he moved into a single room on Rome Ave. He landed a job as a custodian at a Manhattan museum two weeks ago, but he had fallen two months behind on his rent. The landlord, Anthony Mallazzi, told him to be out by 5 p.m. Sunday.

As the deadline neared, one of Mallazzi’s sons heard a sound like a popping paper bag. Mallazzi arrived home soon afterward and went to see if his tenant had moved out. The door was open.

“I said, ‘Kenny? Kenny?'” Mallazzi recalled.

Mallazzi entered and saw Johannemann. Nearby lay the two letters, the one on White House stationery and the suicide note.

“He was a 9/11 hero,” Mallazzi said Wednesday. “He saved a person on 9/11.”

Mallazzi paused.

“Who the hell’s to blame?” Mallazzi said. “I feel a little guilty. Everybody feels a little guilty.”

On Wednesday, Johannemann was waked at a Brooklyn funeral home.

Papa-Boy was at the cousin’s house, cowering in corners, but beginning to venture out.

Andrew McCain, son of Republican presidential nominee John McCain was a member of the bank’s board, but recently stepped down for “personal reasons,” according to The Wall Street Journal. The younger McCain, 46, had also served on Silver State’s audit committee, and was only with the bank for five months before leaving on July 26, the Journal reported.

The Federal Deposit Insurance Corp. was appointed receiver of the bank, located in Henderson, Nev. It had $2 billion in assets and $1.7 billion in deposits as of June 30.

The FDIC said Friday the bank’s insured deposits will be assumed by Nevada State Bank of Las Vegas. Its branches will reopen Monday as offices of Nevada State Bank in Nevada and National Bank of Arizona in Arizona.

The agency said depositors of Silver State Bank will continue to have full access to their deposits.

The 11 failures so far this year compare with three for all of 2007, and federal banking officials have said that more banks are in danger of collapse.

Silver State Bank has operated 12 branches in Nevada and Arizona as well as loan offices in Nevada, Utah, Colorado, Washington, Oregon, California and Florida.

The FDIC estimated its resolution will cost the deposit insurance fund between $450 million and $550 million.

Regular deposit accounts are insured up to $100,000; for some individual retirement accounts, the limit is $250,000.

There were about $20 million in uninsured deposits held in roughly 500 accounts at Silver State that potentially exceeded the insurance limit, the FDIC said.

Concern has been growing over the solvency of some banks amid the housing slump and the steep slide in the mortgage market. The pressures of tighter credit, tumbling home prices and rising foreclosures have been battering many banks, large and small, across the nation.

The largest bank failure by far this year has been that of savings and loan IndyMac Bank, which was seized by regulators on July 11 with about $32 billion in assets and deposits of $19 billion.

The seizure of Pasadena, Calif.-based IndyMac, which was the largest regulated thrift to fail in the United States, prompted hundreds of angry customers to line up for hours in Southern California to demand their money. IndyMac also was the second-largest financial institution to close in U.S. history, after Continental Illinois National Bank in 1984.

The FDIC has been operating the bank, now called IndyMac Federal Bank, under a conservatorship.

The FDIC plans to raise insurance premiums paid by banks and thrifts to replenish its reserve fund after paying out billions of dollars to depositors at IndyMac. The fund, currently at $45 billion, is expected to take a hit from IndyMac of $4 billion to $8 billion.

Federal officials expect turbulence in the banking industry to continue well into next year, and more banks to appear on the FDIC’s internal list of troubled institutions.

Of the 8,500 or so FDIC-insured banks in the country, 117 were considered to be in trouble in the second quarter – the highest level in about five years and up from 90 in the first quarter. The agency doesn’t disclose the banks’ names.

Only 13 percent of banks that make the list fail, on average, and most are nursed back to health or acquired by stronger institutions, according to the FDIC.

The latest quarterly snapshot by the Mortgage Bankers Association on Friday broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure.

Under the plan, which could prompt one of the most sweeping government interventions in the workings of financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies’ common stock would be diluted but not wiped out; while the holdings of other securities, including company debt and preferred shares might be protected by the government.

Instead of giving each company a big capital infusion up front, the government could make quarterly injections as the companies’ losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.

The timing of government action remained unclear last night, and the final details were still under discussion. But as the pace of discussions accelerated, Treasury officials contacted senior congressional leaders yesterday, telling them they might be briefed on the plan this weekend and asking for telephone numbers where they could be reached.

The action would represent a major escalation of the government’s role in private lending. The government would be assuming vast obligations it has historically disavowed, potentially using taxpayer money to make up for private business decisions gone wrong.

In an effort to contain the most profound financial crisis in generations, Treasury Secretary Henry M. Paulson Jr., leaders of the Federal Reserve and other government officials have in recent months upended decades of precedent. A bailout of the two mortgage finance titans would follow a Fed rescue of investment bank Bear Stearns in March and earlier steps to provide implicit government backing to Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac have backed 70 percent of new mortgages in recent months, but both have incurred vast losses on their loan portfolios as the housing market has tanked. Paulson, the architect of the plan, and other government leaders view the mortgage firms as vital to preventing an even broader financial crisis and economic downturn.

The chief executives of the two companies were called into afternoon meetings yesterday at the 17th Street NW offices of the Federal Housing Finance Agency, their direct regulator, sources familiar with the events said.

Published: September 5 2008 18:49 | Last updated: September 5 2008 18:49

The US military provided combat training to 80 Georgian special forces commandos only months prior to Georgia’s army assault in South Ossetia in August.

The revelation, based on recruitment documents and interviews with US military trainers obtained by the Financial Times, could add fuel to accusations by Vlad­imir Putin, Russian prime minister, last month that the US had “orchestrated” the war in the Georgian enclave.

The training was provided by senior US soldiers and two military contractors. There is no evidence that the contractors or the Pentagon, which hired them, knew that the commandos they were training were likely be used in the assault on South Ossetia.

A US army spokesman said the goal of the programme was to train the commandos for duty in Afghanistan as part of Nato-led International Security Assist­ance Force. The programme, however, highlights the often unintended consequences of US “train and equip” programmes in foreign countries.

The contractors – MPRI and American Systems, both based in Virginia – recruited a 15-man team of former special forces soldiers to train the Georgians at the Vashlijvari special forces base on the outskirts of Tbilisi, part of a programme run by the US defence department.

MPRI was hired by the Pentagon in 1995 to train the Croatian military prior to their invasion of the ethnically-Serbian Krajina region, which led to the displacement of 200,000 refugees and was one of the worst incidents of ethnic cleansing in the Balkan wars. MPRI denies any wrongdoing.

US training of the Georgian army is a big flashpoint between Washington and Moscow. Mr Putin said on CNN on August 29: “It is not just that the American side could not restrain the Georgian leadership from this criminal act [of intervening in South Ossetia]. The American side in effect armed and trained the Georgian army.”

The first phase of the special forces training was held between January and April this year, concentrating on “basic special forces skills” said an American Systems employee interviewed by phone from the US army’s Fort Bragg.

The US military official familiar with the programme said the Pentagon hired the military contracting firms to help supplement its own trainers because of a lack of manpower.

The second 70-day phase was set to begin on August 11, a few days after war broke out in South Ossetia. The trainers arrived on August 3, four days before the conflict flared on August 7. “They would have only seen the inside of a hotel room,” quipped one former contractor. Neither MPRI nor American Systems would speak at length to the FT about the programme.

American Systems di­rected questions to the US army’s Security Assistance Training Management Organisation (Satmo) at Fort Bragg, part of the US Army’s Special Warfare Center School. Satmo sends trainers, mainly special forces but also contractors, to countries such as Yemen, Colombia and the Philippines. Satmo trainers generally work with forces involved in counter-insurgencies, counter-terrorism or civil wars. A Satmo spokesman declined to comment.

One US military official familiar with the programme said it emerged from a Georgian offer to the US in December 2006 to send commandos to Afghanistan to work alongside American special operations forces.

According to this person, the US told Georgia that the offer should be made through Nato, which welcomed the offer but informed Georgia that its forces would need additional training to meet the military alliance’s standards.

While the programme is not classified, there is a lack of transparency surrounding it, though US military officials said the lack of publicity was not part of an effort to keep the programme secret. Other US military training programmes in Georgia have their own websites and photo galleries.

A US European Command spokesman confirmed the existence of the programme only after reviewing an e-mail sent by MPRI recruiters that was obtained by the FT. According to the e-mail, which did not mention Nato operations, former US special operations forces would receive $2,000 ($1,150, €1,400) a week plus costs as trainers. “We can confirm the pro­gramme exists, but due to its nature and training ob­jectives we do not discuss specifics to ensure the integrity of the programme and force protection of the trainers and participants,” he said.

James Appathurai, Nato’s spokesman in Brussels, said: “Georgia has made an offer to provide forces to Isaf in the last two years. But until now these Georgian forces have not joined the Isaf mission.” An official at a senior Nato member state said it was understood that the forces had been trained by the US, but that the forces had not passed a certification process under which all potential members of the Isaf mission are vetted.

Additional reporting James Blitz in London

Conflict in the Caucasus

The conflict between Russia and Georgia began on the night of August 7, when Georgian forces, including commando units, tanks and artillery, assaulted the South Ossetian capital of Tskhinvali.

Russia says that at least 133 civilians died in the attack, as well as 59 of its own peacekeepers, according to figures released this week.

The fake bills were discovered when a child tried to use one to pay for lunch. An administrator then tracked down several other students with fake bills. Those students all identified the boy.

The boy—who was not identified—was turned over to the Department of Children and Families after authorities learned his guardians had warrants for their arrest.