Fannie, Freddie in 'no danger'

By Patrice Hill THE WASHINGTON TIMES | Thursday, July 17, 2008

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Federal Reserve Chairman Ben S. Bernanke told Congress on Wednesday that Fannie Mae and Freddie Mac are in "no danger of failing" but Congress should act quickly on legislation to bolster their finances.

The mortgage giants have suffered from a "weakness of market confidence," though they are "adequately capitalized," he said.

"This is clearly a rough time," he said. "We will work our way through these financial storms."

Shares of Fannie, Freddie and other major banks and financial institutions rebounded sharply yesterday as the Fed chief made his remarks to the House Financial Services Committee.

To boost confidence in the mortgage companies and the financial markets generally, the Fed and the Treasury Department on Sunday offered to throw Fannie and Freddie a financial lifeline by temporarily increasing their credit lines with the Treasury and letting the government buy their stock. The Fed voted to allow them to get emergency loans through its discount window.

But the plan to strengthen the agencies ran into snags in Congress on Wednesday. The House postponed until next week a vote on the measure, which is to be combined with pending housing legislation.

Both Republicans and Democrats said they wanted to include provisions to protect taxpayers from an unlimited bailout of the agencies, as appeared possible under the Treasury proposal, which lets the Treasury decide how much aid they would get.

"I want to make darn sure that, if we do this, that the American taxpayer is going to be protected," said Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat.

Congress should shore up confidence in the lenders without sacrificing taxpayers in the process, he said.

Debt from the government-sponsored enterprises "is globally held in extensive amounts so we want to reassure that market that we understand the importance of this," Mr. Dodd said.

House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, suggested prohibiting the companies from paying dividends if they tap their credit lines, while giving regulators a say in the compensation of top executives.

Still, the Democratic leaders said they expect the legislation will pass, even if congressional Republicans refuse to support the bill.

"I think we're going to have it all done by the end of next week," Mr. Frank said.

Democrats may retain provisions in the housing bill to send $4 billion to communities to buy foreclosed properties in order to attract Democratic votes, since Republicans are threatening to vote against the bill, he said.

The community aid provision has attracted a White House veto threat in the past.

Republicans questioned whether the government should be rushing to aid the mortgage companies, forcing taxpayers to foot the costs of their bad decisions.

"Fortunes were made on the way up and pain will be felt on the way down," said Rep. Spencer Bachus of Alabama, the House panel's ranking Republican.

Mr. Bernanke discouraged Congress from drafting a second economic-stimulus package, saying that would be a "bit premature." He repeated his conviction that the most important action Congress can take is to shore up the housing market.

Mr. Bernanke said he is troubled by the jump in inflation to 5 percent in the last year, but he expects it to be temporary. The Labor Department reported a 1.1 percent surge in the consumer price index last month - the most since September 2005.

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