By August 2008, Treasury officials concluded the firms didn't have enough capital and feared what would happen if investors lost confidence in Fannie and Freddie. A failed debt auction by the companies might trigger fire-sales of bond investors world-wide. 'It just would have been catastrophic,' said Mr. Paulson. 'We were racing against the clock here.'

On Friday, Sept. 5, 2008, he summoned the companies' chief executives to separate afternoon meetings and told them they were being taken over. Fannie's board considered its options, including a court battle, but quickly concluded there weren't any good ones. 'Defending the company when the federal government had declared war on it did not seem like a prudent course,' said Daniel Mudd, Fannie's chief executive, in a recent interview. Two days later, the firms had been effectively nationalized, and Mr. Mudd was replaced.

The Obama administration remained conflicted over the mortgage giants. In a 2011 meeting with the president, then-White House economist Austan Goolsbee compared Fannie and Freddie with comic-book villains that had been captured and imprisoned in a cell on the ocean floor. It would be folly, he said, to turn the companies loose because they promised to behave.

'If Fannie and Freddie are allowed to return to their old business model, then shame on us as a nation,' said Mr. Goolsbee, who left the administration in 2011, in a recent interview.