Banking Law

U.S. Takeover of Mortgage Giants Followed Failed Talks at Davis Polk

Updated: The announcement this weekend of a U.S. takeover of the nation’s two mortgage giants followed failed talks with potential Freddie Mac investors at the headquarters of Goldman Sachs and law firm Davis, Polk & Wardwell.

Freddie Mac chief executive Richard Syron made the last-ditch pitch to investors three weeks ago after the stocks of his company fell more than 60 percent in July, along with the stock of Fannie Mae, which had already raised $7 billion in new capital, the New York Times reports.

After the failed talks, Treasury Secretary Henry Paulson concluded he had to exercise the power given to him by Congress in July. This weekend he announced what could become the biggest and costliest ever U.S. bailout of private companies. The two lenders have funded more than two-thirds of U.S. home loans in recent months, the Washington Post reports.

Under the plan, the companies will be placed into a conservatorship, and their chief executives will be replaced. The government will fund the companies in any quarter in which they are insolvent at a cost of up to $100 billion for each lender, the Post story says. In exchange, the government has received $1 billion worth of preferred stock in each company.

Seventeen lawyers from Wachtell, Lipton, Rosen & Katz drafted the agreement in its role as outside counsel to the Treasury Department, reports The BLT: The Blog of Legal Times. The work was done on a pro bono basis.

The takeover followed “a series of miscalculations and deferred decisions,” according to the Times. Executives at the companies played down the risks of the housing bubble and increased their purchases of risky mortgages, then resisted raising enough capital as the housing slump worsened. Lawmakers were also to blame, the story says, by failing to strengthen regulatory oversight over the companies.

Dozens of lawyers were involved in the deal, reports The BLT: The Blog of Legal Times. They include:

• Cleary Gottlieb Steen & Hamilton represented Morgan Stanley, which advised the Treasury Department on the bailout.

• Wachtell advised the Treasury Department.

• Covington & Burling and Davis Polk were outside counsel for Freddie Mac, report the BLT and the Wall Street Journal Law Blog.

• Cravath, Swaine & Moore and Sullivan & Cromwell were outside counsel to Fannie Mae and its board, the BLT and Law Blog report.

Additional coverage:

Washington Post: “U.S. Seizes Control Of Mortgage Giants”

Updated at 12:50 p.m. to include information on the lawyers advising on the deal from The BLT, the Washington Post and the Wall Street Journal Law Blog. Updated on Sept. 11 to include information about Wachtell’s role from The BLT.

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