- The Washington Times - Monday, July 14, 2008

The Treasury and Federal Reserve moved Sunday to bolster the finances of Fannie Mae and Freddie Mac to ensure that the mortgage giants do not succumb to mounting market pressures this week.

The Fed said its board voted to allow the agencies to borrow from the central bank for the first time in case they exhaust their $2.25 billion lines of credit with the Treasury.

Treasury Secretary Henry M. Paulson Jr., who worked on the plan through the weekend with Fed Chairman Ben S. Bernanke and other top regulators and legislators, said he will seek emergency authority from Congress for a temporary increase on the amount that the mortgage agencies can borrow from the Treasury and enable the Treasury to purchase some of their stock.

Analysts said the moves were deemed necessary because Freddie Mac is scheduled to try to raise $3 billion through debt securities on Wall Street Monday and faced the prospect of not being able to sell the bonds - a debacle that could trigger financial panic worldwide.

“Fannie Mae and Freddie Mac play a central role in the housing finance system and must continue to do so in their current form as shareholder-owned companies,” said Mr. Paulson. “Their support for the housing market is particularly important as we work through the current housing correction.”

The White House issued a statement urging Congress to act quickly on the emergency rescue plan and include it with the housing bill pending in Congress that would strengthen regulation of Fannie and Freddie.

Mr. Paulson stressed that the government assistance is intended to be temporary to get the agencies through particularly difficult market conditions. Without specifying, he said he would include provisions to “protect the taxpayers” in the emergency legislation he is seeking.

Standard & Poor’s Corp. has estimated that a bailout of Fannie and Freddie, which together finance $5.2 trillion in mortgages, or about half the mortgage market, could cost taxpayers as much as $1 trillion, although the credit agency said last week that it did not expect any assistance to be so large.

In a sign that the bailout likely will noticeably increase federal budget deficits, the Treasury is said to be seeking an increase in the federal debt limit to accommodate the borrowing needed to rescue the mortgage giants.

Mr. Paulson and his predecessors at the Treasury previously have sought to limit the government’s exposure to the highly leveraged mortgage agencies, so even a partial pledge of support represents a major reversal for administrations going back several decades.

The Treasury secretary hinted at the reason for his decision by acknowledging the critical role of Fannie and Freddie, not only in financing 80 percent of home purchases and refinancings this year, but also in providing liquidity for the U.S. to finance its budget and trade deficits.

Fannie and Freddie securities are purchased around the world, by central banks from China to Brazil as well as by U.S. banks, pensions and investment funds.

Sen. Charles E. Schumer, New York Democrat, applauded the Treasury plan as “surgical and carefully thought out” and predicted it would “maximize confidence in Fannie and Freddie while minimizing potential costs to taxpayers.”

Senate Majority Leader Harry Reid, Nevada Democrat, said, “Senate Democrats stand ready to work with the administration to quickly and effectively address the situation currently facing these institution.”

Sen. Barack Obama, the presumptive Democratic presidential nominee, speaking with reporters before the plan was announced, said he favored congressional action to shore up the housing market, as well as legislative consultation about any taxpayer dollars used to support the mortgage companies.

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