Fed Announces Rescue Plan For GSEs

Whether Fannie Mae (FNM) and Freddie Mac (FRE) have reached a point to where one or both of the GSEs can no longer honor their commitments toward providing liquidity and stability to the housing and mortgage markets for the long term ; remains to be seen. In the meantime, government officials are doing their best through supportive statements and rescue plans for the mortgage giants to try and avert another IndyMac/Bear Stearns scenario.

According to Bloomberg – Senator Christopher Dodd said earlier on Sunday that the largest providers of U.S. mortgage financing, are in a “sound situation”.

They have more than adequate capital, in fact more than the law requires,” Dodd, a Connecticut Democrat who is chairman of the Senate Banking Committee, said on CNN’s “Late Edition” today. “They have access to capital markets. They’re in good shape.” – “To suggest somehow they’re in major trouble is not accurate,” Dodd said.

Sen. Dodd’s statement was then several hours later followed by an announcement from Treasury Secretary Paulson. In it Mr. Paulson unveiled a rescue plan for both GSEs with increased credit line and possible stock purchases ; placing this way the federal government firmly behind the mortgage giants.

“If either of the companies asks for it they could have access to a line of credit or an equity investment by the U.S. government. Both the line of credit and the liquidity backstop would be temporary, but could be in place for up to 18 months”. [Via WSJ]

Treasury Secretary did not provide any specifications, in terms how high the line of credit might go or how much of an equity stake Treasury might purchase. The line of credit for the two companies is currently capped at $2.25 billion.

Mr. Paulson started his statement by emphasizing the vital role that Freddie and Fannie play in the housing finance system. He stressed the point that both GSEs must continue to do so in their current form as shareholder-owned companies.

“GSE debt, said Paulson – is held by financial institutions around the world. Its 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”.

Paulson then proceeded in saying that he had consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
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Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.
Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.
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Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards. [Via Treasury Dept]

Secretary Paulson concluded by saying : “I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package”.

The unprecedented moves and hectic maneuvering by officials in the last several days, shows the insistence on the part of the government to reassure financial markets about its support of both companies.

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