US takes steps to shore up Fannie, Freddie
Washington, July 14, 2008
The United States on Sunday offered massive aid to Fannie Mae and Freddie Mac to bolster confidence in the mortgage finance giants and head off a potential meltdown in financial markets.
The dollar jumped and stock futures rallied on the powerful message of support from the US Treasury and the Federal Reserve, which also drew criticism for being a potential bailout that could cost US taxpayers dearly. Major Asian markets opened firmer on news of the US proposals.
Unveiling the emergency measures to calm markets roiled by the country's prolonged housing crisis, the Fed said Fannie and Freddie could have access to its emergency cash, echoing a move to backstop investment banks after the Fed orchestrated a takeover of ailing investment bank Bear Stearns in March.
The Treasury separately said it would temporarily boost its line of credit to the two mortgage financiers, as well as purchase equity in them, a step never taken before, if needed.
Both companies, which are shareholder-owned but also government-sponsored, said they are adequately capitalized, but welcomed the measures and said they would help confidence.
Officials are desperate to calm nerves ahead of a crucial debt issue by Freddie Mac on Monday and after US bank regulators on Friday seized mortgage lender IndyMac Bancorp in the third-largest bank failure in US history.
"(Their) continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore, we must take steps to address the current situation as we move to a stronger regulatory structure," US Treasury Secretary Henry Paulson said in a statement that he read on the steps of the Treasury building.
A senior Treasury official said all the actions it proposed need congressional approval, but expressed confidence that could be secured this week.
A spokesman for Speaker of the House of Representatives Democrat Nancy Pelosi said she would work with the Republican administration of President George W Bush on this matter.
Shares in the two mortgage giants, which own or guarantee just under half of the country's $12 trillion in outstanding mortgage debt, have been hammered by concerns that they might run out of capital amid mounting home-loan losses. On Sunday the Securities and Exchange Commission stepped in to warn against rumor-mongering of any kind against any firm.
The SEC said it will conduct investigations to make sure that no false information was being spread, although it did not name any companies it felt might be victimized.
Housing woes have forced the Fed to slash benchmark interest rates since September and open its discount window to investment banks for the first time since the Great Depression some 80 years ago.
Fannie and Freddie buy mortgages from lenders and package them into guaranteed securities, providing more funds to keep mortgage markets lubricated.
They also borrow regularly on capital markets to fund their operations and one investor predicted Freddie's planned auction of $3 billion in 3- and 6-month notes on Monday would go well.
Dan Fuss, vice chairman of Boston-based Loomis Sayles, which oversees more than $100 billion in fixed-income securities, also said he had been buying Fannie and Freddie paper in recent days because it was "outstanding value".
Freddie and Fannie debt rallied sharply on Friday as investors bet they would get closer government backing and analysts said that this was in fact happening. - Reuters