Back on July 21st of 2008, Treasury Secretary Henry Paulson met with some other Goldman Sachs alumni who ran investment firms. Fannie Mae was trading at $14.13 a share and Freddie Mac shares were fetching $8.75. Paulson had told the press that the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books and that he believed the exam would calm the markets.
But over lunch with his Goldman friends, Paulson speculated about what putting Fannie and Freddie into conservatorship would look like. Bloomberg Businesweek describes the conversation:
Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.
The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.
The government took over the GSEs on Saturday, September 6th. By the following Monday, Fannie and Freddie shares were trading under a dollar.