[Updated 9.8.08. Since I wrote this post, federal law has changed, as a banking law practitioner was kind enough to point out to me. Section 1367 of the Housing and Economic Recovery Act of 2008, Pub. L. 110-289, which became law on July 30, 2008, changes the GSE conservatorship provisions to ones that very closely track the bank conservatorship provisions of the Federal Deposit Insurance Act. In light of these (very needed) changes, the concerns I expressed in the post are no longer an issue.]
One of the possible rescue options for Fannie Mae and Freddie Mac is a conservatorship. But what would this look like? The New York Times relates that "Officials said that [Treasury Secretary] Paulson wanted to convey the message that…a conservator would have to prepare a plan to restore the company to financial health, much like a company in Chapter 11 bankruptcy proceedings."
That’s the general idea, but the devil is very much in the details, as explained below the break.