Possibly the only real surprise in the plan announced yesterday to salvage Fannie Mae and Freddie Mac is that the newly appointed chief executives don’t come from Treasury Secretary Paulson’s former stomping ground — Goldman Sachs.

The former head of TIAA-CREF, Herb Allison, will take over the top spot at Fannie Mae, following the departure of the chief executive, Dan Mudd. Meanwhile, the retired chief financial officer of U.S. Bancorp, David Moffett, will helm Freddie Mac, replacing Dick Syron. Both Messrs. Syron and Mudd have agreed to stay on for a period of time to help smooth the transfer of management.

Messrs. Allison and Moffett are both seasoned financial executives who are not tainted by the subprime crisis. In the search for new managers with that qualification, there were but two candidates, and they were duly selected.

Mr. Allison knows something about working in a firm with a public mission. He served until April of this year as chairman and CEO of the nonprofit TIAA-CREF, a money management operation originally set up in 1918 by Andrew Carnegie to provide retirement plans for professors. He assumed the post in 2002.

“Herb Allison is a very good choice for Fannie Mae. He’s a smart guy who is organized and who understands risk,” a colleague from Mr. Allison’s Merrill Lynch days, Barry Friedberg, said.

That will surely set him apart. If nothing else, perhaps Mr. Allison can bring along the tagline from his former outfit: “Financial Services for the Greater Good.”

Aside from these astute new hires, it came as little surprise that the government’s unofficial backstopping of Fannie and Freddie has now become more explicit, following weeks of speculation about a government takeover of the two mortgage giants.

It also is not surprising that the current administration had no appetite for restructuring the impossibly conflicted mission — maximizing profits while also serving the social goal of broadening home ownership — of the mortgage giants. Since the new plan is acknowledged to be temporary, they have clearly left that puzzle for those who follow.

The new arrangement, called “conservatorship,” was set forth yesterday in statements from the head of the new Federal Housing Finance Agency (and former chief of OFHEO), James Lockhart, and Mr. Paulson.

In effect, the Treasury will pump money into new senior preferred stock and warrants of the GSEs, as needed, to maintain a positive net worth for both companies. To soften the bite on taxpayers, and for cosmetic reasons, the GSEs will immediately eliminate dividend payments on their common and preferred stock and cease payments to lobbyists.

These moves allow Fannie and Freddie to return to their much-needed roles as providers of liquidity to the mortgage markets. Because of a loss of confidence in the giant companies’ finances, their ability to fund themselves, to sell mortgage-backed securities, and to buy mortgages from banks has all but disappeared.

The upshot of this breakdown has been a widening of spreads on the GSE’s mortgage-backed securities, which Mr. Lockhart says has meant that “virtually none of the large drop in interest rates over the past year has been passed on to the mortgage markets.”

Since, in Mr. Paulson’s words, “the housing correction poses the biggest risk to our economy and … Fannie Mae and Freddie Mac are critical to turning the corner on housing,” the GSEs had to be resuscitated. Given the sheer volume of the GSEs’ exposure — $5.4 trillion in guaranteed debt, or about the same as all the publicly held debt of American — and their role in the marketplace, accounting for some 80% of all new mortgages earlier this year, failure was not an option.

In his statement, Mr. Lockhart also says the GSEs’ contribution has been minimized because, in response to the need for capital, both companies “have continued to raise prices and tighten credit standards.” Clearly, not what the mortgage market has needed, though perhaps very much the remedy required by companies infected with toxic assets.

It is exactly this bifurcated role that Messrs. Paulson and Lockhart implicitly blame for the collapse of the GSEs. Mr. Paulson mentions the “inherent conflict and flawed business model embedded in the GSE structure.” He is entirely correct. No enterprise can serve two masters, both attempting to earn as much money as possible for common shareholders who put their money at risk, and, at the same time, extending mortgage money to financially challenged homebuyers.

The new plan is intended to shrink the size of the GSEs, which is necessary. After allowing the firms to help the mortgage markets by modestly increasing their portfolios through the end of 2009, regulators will require that they then shrink their assets at a rate of 10% a year thereafter, through “natural runoff.” This is a reasonable starting point. At the end of the day, the sheer size of the GSEs limited the authorities’ options.

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