U.S. plan for Fannie, Freddie to hit shareholders

By John Poirier and Patrick Rucker

WASHINGTON (Reuters) - The U.S. government plans to take over Fannie Mae and Freddie Mac and all shareholders of the two mortgage giants will take a hit, an influential lawmaker said on Saturday.

The move to take control of the two companies, expected to be announced on Sunday, could amount to the largest financial bailout in the nation's history, and is a bid to ward off further damage to a housing market in its deepest downturn since the Great Depression.

"I think all shareholders will be disadvantaged," Rep. Barney Frank, chairman of the U.S. House of Representatives Financial Services Committee, told Reuters.

"The government will act as the new management," implying the chief executives would be ousted, according to Frank, who spoke to U.S. Treasury Secretary Paulson on Friday about the plan to put the companies into federal conservatorship to protect the interest of all parties.

An industry source said the two government-sponsored enterprises were sent a letter by their regulator, the Federal Housing Finance Agency, detailing shortcomings at the companies and explaining why the federal government was taking control.

The source said the letter suggested the companies, which own or guarantee almost half of the country's $12 trillion in outstanding home mortgage debt, should agree to the arrangement in order to avoid the more onerous step of being placed in a receivership in the interests of debtholders.

In a separate interview with The Washington Post, Frank said the government was expected to control the companies for at least a year as it considers whether they should remain government-run, or be restructured.

Paulson, Federal Reserve Chairman Ben Bernanke, and the director of the companies' regulator, James Lockhart, met with the chief executives of the two companies on Friday to detail the plan.