Treasury, Fed announce rescue plan for Fannie, Freddie

The Bush administration acknowledged today that it couldn't afford to leave mortgage giants Fannie Mae and Freddie Mac on their own to face another ravaging by Wall Street.

The government announced plans to provide financial backup to the battered companies amid fears that they could face failure as home loan defaults keep rising.

Treasury Secretary Henry M. Paulson Jr. said the Bush administration’s proposal, which will need Congress' approval, would boost the companies’ ability to borrow from the Treasury if needed, and would allow the Treasury to buy stock in the companies to bolster their capital.

Separately, the Federal Reserve today said it would permit the companies to borrow directly from the central bank if they needed short-term cash.

Shares of Fannie Mae and Freddie Mac, which combined own or guarantee about $5 trillion in home loans -- roughly half the entire U.S. market -- both lost more than 45% of their value last week amid furious selling tied to rising concerns about the companies’ solvency.

Paulson last week insisted that the companies’ finances were sound. But the deepening pessimism about the firms on Wall Street, and the spillover into financial markets in general, left the government little choice but to step up with a potential rescue plan -- even though it is sure to be perceived as yet another government bailout of private interests.

Because of the companies’ size and their importance in providing funding to the mortgage market, "we must take steps to address the current situation," Paulson said in a statement this afternoon.

Key elements of the proposal the White House will send to Congress:

--Bigger credit lines with the Treasury: As a "liquidity backstop," the Treasury would temporarily increase the lines of credit Fannie Mae and Freddie Mac have with the agency. The companies currently can borrow up to $2.25 billion each from the Treasury, although they’ve never tapped those lines. The current lines long have been minuscule compared with the growth of the companies' assets (now $843 billion for Fannie, $803 billion for Freddie).

The Treasury didn't spell out the size of the new credit lines.

--Possible stock purchases by the Treasury: To ensure that the companies have "access to sufficient capital to continue to serve their mission," the Treasury would get temporary authority to buy stock in either of the companies "if needed."

"Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer," Paulson said.

The idea of an equity infusion may be the most contentious issue in the Treasury's plan because it will be seen as a bailout of the companies' current shareholders, which include some of the nation's biggest investment firms. But any equity stakes the Treasury would take almost certainly would result in severe  dilution to current investors, if not wiping out their stakes entirely.

Some experts, including former Federal Reserve Bank of St. Louis President William Poole, have said that nationalizing the companies -- turning them back into government agencies -- is the only practical solution to the challenges they face from surging losses on defaulted home loans.

--New oversight by the Federal Reserve: To protect the financial system from "systemic risk" going forward, the Federal Reserve would be given a "consultative role" in setting capital requirements and other "prudential standards" for Fannie Mae and Freddie Mac. This looks like an admission of a lack of faith in the companies' current regulator, the Office of Federal Housing Enterprise Oversight.

In its separate announcement today, the Fed said it granted its New York branch the authority to lend to Fannie Mae and Freddie Mac "should such lending prove necessary." The Fed normally lends to commercial banks, and, since March, has opened its borrowing window to brokerages as well, in an attempt to ease the credit crisis stemming from the bursting of the housing bubble.

Daniel Mudd, chief executive of Fannie Mae in Washington, said in a statement that the company "appreciates today’s announcements and the expressions of support."

Freddie Mac's CEO, Richard Syron, said the McLean, Va.-based company was "heartened" by the Treasury and Federal Reserve announcements.

Whether Wall Street is comforted will be evident in the action in the companies' stocks Monday and the reaction of the credit markets to Freddie Mac's plan to issue $3 billion in short-term debt, part of its routine financing program.

Photo: Henry M. Paulson Jr. by Karim Jaafar/AFP Photo

Comments

[Lamb Cannon]

This country is run by a bunch of whiners!

[tim]

This is ridiculous.....bad business practices are rewarded with corporate welfare. The rich stay rich while the rest of us die.

[Warren Chase]

Bailouts should include investigation of these responsible and suitable punishment. Please, none of the typically huge golden parachutes given management failures. Also, I didn’t take out fanciful loans to live a lavish life style. The free spenders will be pampered and rewarded, how will the government reward me? by letting me pay the taxes to bail them out?

[Drew]

LIARS!!! Any American with a brain, take a few hours and research the Federal Reserve and EVERY newspaper outside of the United States. It is the DOLLAR and the Federal Reserve, not the American people, not Bush, not the oil companies, they are taking us for everything we own. Our forefathers warned of a central bank and a few abolished it, we are issued our currency at interest, read the Grace Commission report hat was done by both Republicans and Democrats, like there is a difference , every penny of the income tax is solely absorbed by interest on the national debt. Our country has been hijacked and it is high time the American public take it back per the Declaration of Independence. Verify all I have said for yourself PLEASE educate yourself on how the economy really works. They need to raise interest rates now and impose tariffs. Please America wake up for your children's sake. The Federal Reserve is a PRIVATE bank that is not held accountable to anyone, we are not even allowed to know who owns it, our own congress is not allowed.

[Richard Sroka]

How about requiring that the oil companies be the lenders of choice for Freddie Mac and Fannie Mae. They've got plenty of money to play with!

[Jason Baker]

Ultra-billionaire banks get bailed out with taxpayer money, but New Orleans is still in ruins. Years after Republicans deregulated the banking industry and made it accountable to no one, the American people are now expected to pay three times over for the privilege of being robbed - as consumers, then through our retirement accounts, and now as taxpayers. There is no bottom to the hypocrisy and corruption that is the Bush regime. They are holding our nation hostage.

[Elie Elhadj]

Credit 101 to bankers
In December 1863, H. McCulloch, U.S. Comptroller of the Currency and later Secretary of the Treasury, wrote to all national banks. Here are some of the paragraphs.

“Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.
“Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.
“If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you. “Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.
“The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.
“Pursue a straightforward, upright, legitimate banking business. ‘Splendid financing’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.”

The sub-prime mortgage debacle should serve as a reminder, yet again, that gamblers must not be allowed to manage society’s saving. Central banks need to institute qualifying psychological testing to bar bank leaders with gambling propensity from wheeling and dealing in customers’ deposits and shareholders equity.

Elie Elhadj
http://journals.aol.com/eeh100/daring-opinion/

[archie]

Just let them crash and house prices will come down !!!!!

[Harvey]

THIS is financial terrorism being committed on us by our own government.

WE bail out slimy banks so THEY can continue their wealthy lifestyles?

Let the poorly managed banks fizzle and die and lock up those responsible for CMO's and other such shady bank instruments.