This move is expected to strip essentially all the value from existing preferred shares. Fannie Mae shares traded down to $3.50 / share in after-hours trading on Friday as rumors of the pending move by Paulson made the rounds. Paulson seems to think the shares will drop even more significantly as evidenced by his statement that "The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses... [will] reduce their regulatory capital below 'well capitalized.'"

Although the total cost of the rescue is still uncertain, it seems likely to be the most expensive in history, since Fannie and Freddie currently back about half of all US mortgages between them. With mortgage defaults continuing to increase, that amounts to some pretty lofty exposure numbers, although no one can say what portion of the $5.4 trillion in Fannie and Freddie backed debt will eventually default. More than 8000 banks currently hold mortgage guarantees from either Freddie Mac or Fannie Mae.

Both companies will also have new leaders. For Fannie Mae, CEO Daniel Mudd will be replaced by Herb Allison. Allison previously held the position of chairman and CEO of TIAA-CREF, a retirement plan provider. Freddie Mac's CEO, Richard Syron, will be replaced by David Moffett, the former vice-chairman and CFO of US Bancorp.

With the move by Paulson, both Freddie Mac and Fannie Mae are expected to be able to meet all existing obligations. This expectation was confirmed by Standard and Poor's reiteration of its AAA rating for both companies while pronouncing them "stable." Stakeholders around Washington and Wall Street hailed the move. Ben Bernanke, The Chairman of the Federal Reserve, said "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets."