Treasury Secretary Henry Paulson delivered the news that everybody had been waiting for: Fannie Mae and Freddie Mac, the two mortgage financing giants, have been placed into government conservatorship. The plan outlined this morning also includes the Treasury purchasing mortgage-backed securities from the firms in the open market. Paulson acknowledged that the proposal poses risks for U.S. taxpayers, giving the U.S. government a "large stake in the future value of these entities." From the WSJ:

The FHFA, which regulates the two government-sponsored enterprises, will act as conservator of the two firms, taking control of the companies' day-to-day operations. The agency said in a press release that there is "no exact time frame" for when the conservatorship may end, and that the powers of the firms' stockholders will be suspended until the conservatorship is terminated. As conservator, the agency said it would be able to take "all actions necessary and appropriate to (1) put the company in a sound and solvent condition, and (2) carry on the company's business and preserve and conserve the assets and property of the company."

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The move was made as the companies continue to suffer from the ongoing collapse of the U.S. housing market. The firms have run up combined losses of around $14 billion over the past four quarters and face heavy additional losses as foreclosures are expected to continue to set records. The longer-run future of the companies will be up to Congress, which created both of them to support the housing market, as well as the next administration.

It's doubtful whether anybody really knows what the government has gotten itself into. These companies are enormously complicated and peculiarly structured, so there's no telling what lurks behind all the rocks. Government advisers going through the books already discovered that Freddie Mac's accounting methods had overstated its capital cushion, the NYT reports. That, along with the worsening housing news, apparently influenced the government into taking the action now.

The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies’ capital resources and financial stability. Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.