how it all started.
(September 7, 2008, 12:00 AM EDT) -- The Bush administration's decision to place both Fannie Mae and Freddie Mac under "conservatorship" effectively amounts to the largest bankruptcies in U.S. history, even if the mortgage giants are not technically bankrupt.
A conservatorship is the legal process in which a person or entity is appointed to establish control and oversight of a company to put it in a sound and solvent condition. In a conservatorship, the powers of the Company’s directors, officers, and shareholders are transferred to the designated Conservator.
"The goals of the conservatorship are to help restore confidence in the Company, enhance its capacity to fulfill its mission, and mitigate the systemic risk that has contributed directly to the instability in the current market," the Treasury Department said.
The companies will still have their shares listed on the New York Stock Exchange, but the shares are likely to fall sharply in value. Shareholders will have no control over the companies until the FHFA determines that the companies are ready to "emerge" from their conservatorship.
Under the law, the conservator is granted some avoiding powers, although more limited than a trustee in bankruptcy, according to Adam Levitin, an Associate Professor of Law at Georgetown Law School.
The government relied in part on advise from investment bankers at Morgan Stanley and lawyers at Cleary Gottlieb, the newspaper said.
