The government takeover of Fannie Mae and Freddie Mac wasn't just welcomed by U.S. markets; it also received broad support from the Fed, other central bankers and financial newspapers. However, many are also concerned about how much the de facto nationalization of the government-sponsored enterprises (GSEs) could cost American taxpayers.

Paulson said on Monday in a CNBC interview that the government's takeover was necessary, but it was "not something I wanted to do." He said the GSEs were critical to the U.S. economy, which he doesn't think can recover until the housing correction "is behind us."

Fed Chairman Ben Bernanke said he "strongly endorse(d) the action," adding that the "necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets."

The Wall Street Journal, which called the move the "most dramatic market intervention in years," reported that Bush administration officials argued that the cost of not acting would be far greater than the action taken.

European Central Bank President Jean-Claude Trichet called the decision "very important" and "welcome, taking into account the circumstances."

Similarly, Bank of Japan Governor Masaaki Shirakawa said Paulson's decision "will promote the stability of the American MBS (mortgage-backed securities) and financial markets, as well as the global financial system."

Economists say the decision could contribute to 30-year fixed-rate mortgage rates falling below 6%, a rate that has failed to take hold despite the U.S. central bank's rapid slashing of the target rate over the past year. In addition, the Treasury said it will purchase more than $5 billion of new mortgage-backed securities issued by Fannie and Freddie via the open market.

On the downside, weekly newspaper The Economist said "the eventual cost to the public purse is unknown and potentially huge," noting the size of the bill will depend on the ability of the GSEs to recover, which is far from certain. "Freddie is insolvent and Fannie not far off. Moreover, with house prices still sliding and foreclosures rising sharply, worse may be ahead," the newspaper said.

The New York Times added that the rescue package is "an extraordinary federal intervention" that could become "one of the most expensive financial bailouts in American history."

What will ultimately happen with the two GSEs remains unclear. The companies' shares will be listed publicly, with management control going to the Federal Housing Finance Agency until Fannie and Freddie are considered financially healthy. Congress will then have to decide whether the GSEs should be re-launched or replaced.

In the meantime, the companies will be forced to reduce their portfolios by 10% per annum until they reach $250 billion, according to the Treasury, which will be purchasing a total of $5 billion of mortgage securities in September.

By Patrick McGee and edited by Nancy Girgis
©CEP News Ltd. 2008