Sept. 5 (Bloomberg) -- Treasury Secretary Henry Paulson met with regulators and executives of Fannie Mae and Freddie Mac today as the Bush administration prepared to announce a plan to prop up the firms hit by $14.9 billion in losses the past year.

The plan is likely to involve putting at least one of the companies under government control in a conservatorship, according to a person briefed on the discussions. The move may also result in changes in the leadership of Fannie and Freddie, said the person who spoke on condition of anonymity.

Pacific Investment Management Co., manager of the world's biggest bond fund, and other large investors may put in their own money once the Treasury decides to inject government funds, said Newport Beach, California-based Pimco fund manager Bill Gross, in a Bloomberg Television interview.

The meetings come a month after Paulson hired Morgan Stanley to advise on any use of taxpayer funds to recapitalize Fannie and Freddie, which account for almost half of the $12 trillion U.S. mortgage market. A government takeover would be the latest attempt to blunt the impact of the yearlong credit crisis, after the Federal Reserve provided financing for Bear Stearns Cos.'s takeover by JPMorgan Chase & Co.

Paulson gathered with Federal Reserve Chairman Ben S. Bernanke, Fannie Mae Chief Executive Officer Daniel Mudd, Freddie Mac CEO Richard Syron and Federal Housing Finance Agency director James Lockhart in Washington. The Treasury plans to brief Democratic presidential candidate Barack Obama's campaign team tomorrow and has contacted Republican contender John McCain's staff about its intentions.

`Open Their Wallet'

``They have to open their wallet,'' Gross said, adding that the Treasury will want to act before the FHFA releases an assessment of Fannie Mae's and Freddie Mac's capital later this month.

The Washington Post reported that government officials told Fannie and Freddie they plan to put them into a conservatorship, where common stock would be diluted while not wiped out, citing sources it didn't name. Debt and preferred shares would be protected, and the government would make quarterly injections of funds as the companies' losses warranted, the Post said.

Washington-based Fannie and Freddie dropped in after-hours trading. Fannie dropped $2.25, or 32 percent, to $4.79 at 5:50 p.m. in New York Stock Exchange trading and Freddie slumped $1.40, or 27 percent, to $3.70.

Paulson has made no public comment on the backstop for Fannie and Freddie since Aug. 10, when he reiterated he had ``no plans'' to use his authority. Shares in Freddie and Fannie have dropped 9 percent and 16 percent, respectively, since then as investors and analysts called for Paulson to clarify his intent.

`Making Progress'

``We are making progress on our work with Morgan Stanley, FHFA and the Fed,'' Treasury spokeswoman Brookly Mclaughlin said today in Washington.

Should any public money be injected into Fannie and Freddie, ``the management and board should immediately be replaced, multimillion-dollar salaries should be cut, and bonuses and other compensation should be eliminated,'' McCain wrote in a July.

Obama last month echoed that position, saying he had ``no sympathy'' for Fannie and Freddie's CEOs. The government has to decide whether the companies should be made private or taken ``out of the profit-making business,'' he said.

Mudd and his aides have also been meeting at the FHFA, which oversees the two firms, with catered food scheduled for delivery at the agency through the weekend.

Fed Role

Bernanke participated in today's meetings because the central bank was given a consultative role in overseeing Fannie's and Freddie's capital under the July legislation.

Mudd and Syron must approve of any government intervention under the law, unless the FHFA declares that either firm has insufficient capital. The legislation gave the Treasury the power through the end of next year to extend unlimited credit to or make equity purchases in the firms.

The FHFA was scheduled to release its own assessment of the companies' capital levels as early as this week as part of a quarterly appraisal of their finances.

Analysts have speculated that the Treasury would wipe out common shareholders, while seeking to shield preferred stockowners from total loss. Fannie and Freddie preferred shares are typically owned by banks and insurance companies. Their $5.2 trillion of debt outstanding is held by investors including Asian central banks, and would probably be guaranteed, analysts said.

Raising Capital

A specific fallback plan should Fannie and Freddie fail may enhance their ability to raise new private capital, said Alex Pollock, fellow at the American Enterprise Institute in Washington and former president of the Chicago Federal Home Loan Bank.

``Treasury's main concern is the debt markets, and if it was to say that it will do whatever is necessary to keep Fannie and Freddie running, the better it is for their funding,'' Pollock said. ``If Treasury makes it clear they have a plan ready to go, that would certainly help.''

Mclean, Virginia-based Freddie Mac's board this week relaxed its ownership rules to make it easier for investors to take a large stake in the company. It rolled back a rule in its bylaws that precluded owners with a 20 percent or more controlling interest from voting without the approval of all other shareholders.

The two companies need to sell billions of dollars of bonds each month to pay off maturing debt, and have continued to issue securities this week.

Mudd at FHFA

Mudd was accompanied by Fannie General Counsel Beth Wilkinson and Chairman Stephen Ashley in his visit to FHFA this afternoon.

FHFA spokeswoman Stefanie Mullin declined to comment, as did Mark Lake at Morgan Stanley.

The Wall Street Journal reported earlier that Paulson is close to completing a plan that includes changes of senior management, according to an unidentified person familiar with the matter. The Journal also said the plan involved what it called a creative use of the Treasury's powers, without citing anyone.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: September 5, 2008 22:45 EDT