- The Washington Times - Wednesday, August 6, 2008

The U.S. Treasury Tuesday said it hired Morgan Stanley to study the department’s new authority over Fannie Mae and Freddie Mac, the country’s two largest sources of mortgage financing.

“We have no plans to utilize the temporary authorities,” the Treasury said. “This action should be interpreted as a prudent preparedness measure, and nothing more.”

Congress last month passed a housing bill that gives Treasury Secretary Henry M. Paulson Jr. unspecified powers to make emergency loans to Fannie Mae and Freddie Mac and buy equity in the companies if deemed necessary for market stability. Under the contract, Morgan Stanley will provide “market analysis and other financial expertise” related to these new powers and scenarios in which they might be used.

“Treasury does not, in its normal work, undertake these kinds of transactions,” the Treasury said. “We have a responsibility to the taxpayer and to the overall financial system to thoroughly analyze and understand these authorities, should circumstances ever warrant their use.”

The contract calls for a “sensitivity analysis on the financial profile” of the government-chartered companies and an “assessment of appropriate capital structures.” Morgan Stanley also will analyze the relationship of the companies to “broader capital markets,” according to the Treasury.

The Treasury said it solicited bids from several firms before picking Morgan Stanley for the $95,000 contract, which runs through Jan. 17. Mr. Paulson’s domestic finance office will supervise the project.

Mr. Paulson, a former chairman of Goldman Sachs Group Inc., “believes in the ideal that you need to pay for expert advice and he believes he needs expert advice to be brought into him” on Fannie Mae and Freddie Mac, said Jim Bianco, president of Bianco Research LLC.

Morgan Stanley said it is charging no fees for the work, only recouping expenses.

“If the Treasury ultimately is faced with the need to inject capital into Fannie and Freddie, it’s going to involve some very complicated financial decisions,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, N.J., research firm. “Getting a source of information independent of the new regulator will be helpful.”



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