Fannie, AIG Struggle After Federal Takeover

Fannie Mae, a federally chartered company based in the District, reported a $29 billion loss for the quarter. The firm said yesterday that the government's assistance "may prove insufficient." (By Bill O'leary -- The Washington Post)

Two months after the government began taking over ailing financial companies, the two largest efforts have failed to go as planned, with the firms complaining that federal officials set overly strict terms and took other unhelpful rescue measures.

Fannie Mae yesterday reported a $29 billion loss for the three months ended Sept. 30 and warned that the mission it was given by the government, to help revive the mortgage market, could be compromised unless the Treasury Department takes new steps to support the company. Fannie Mae chief executive Herbert M. Allison has approached the Treasury about providing more help, but Treasury Secretary Henry M. Paulson Jr. has demurred, according to three sources familiar with the discussions.

The insurance giant American International Group, meanwhile, reported a $24.5 billion quarterly loss yesterday as the government agreed to offer it a more generous lifeline in the form of a new, $152 billion loan on easier terms. The government extended an $85 billion loan to AIG in September followed by $38 billion more in October, but the company has been eating away at it at an accelerating pace.

The struggles of these two largely nationalized companies underscore the government's difficulty in intervening in private markets in a way that both protects taxpayers and ensures that the rescue efforts succeed. The government's experience in addressing the financial troubles at Fannie Mae and AIG offers a cautionary tale at a time when Washington is debating whether to extend the federal umbrella to Detroit automakers and other beleaguered firms. Before September, it had been a generation since the government took over a private company out of concern that its failure could endanger the U.S. economy.

At both Fannie Mae and AIG, the reported losses largely reflected poor decisions by the companies before the government intervened.