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.
House Minority Leader John Boehner, Ohio Republican, and Minority Whip Roy Blunt, Missouri Republican, said they “stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets.”
The Securities and Exchange Commission contributed to the emergency plan earlier Sunday by issuing an unusual warning saying that it will take action against stock traders who float false rumors that appear aimed at driving down a company’s stock - a problem that analysts say may have added to Fannie’s and Freddie’s woes and is endangering the solvency of some Wall Street titans like Lehman Brothers.
The Federal Deposit Insurance Corp. issued a statement reassuring people who have deposited money in IndyMac bank, which federal liquidators took over on Friday.
Joshua Rosner, managing director at Graham Fisher who has talked with Treasury officials but is not advising them, said the attempt to limit the government’s liability will not work, because markets will interpret the rescue plan as a blanket guarantee on all the companies’ debts.
He said the government should have made clear it is guaranteeing only about $3.5 trillion of agency obligations that directly support the housing market.
“The government proposal fuels risk-taking,” he said. “Every time the government allows investors to believe they will bail out the senior debt holders, it becomes harder for them to do otherwise.”