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US spells out Fannie-Freddie backstop plan
(Agencies)
Updated: 2008-07-14 09:49 Sunday's announcements are likely to raise anew criticism that the government should have moved sooner to rein in the two companies, especially since investors widely assumed they would be bailed out if they got into trouble. The government denied it, but what was seen by investors as an implicit guarantee of support allowed Fannie and Freddie to borrow at rates only slightly higher than the Treasury -- and lower than what their banking competitors had to pay. "This really blows away the notion of an implicit guarantee," independent banking consultant Bert Ely said of the Treasury's plan to ask Congress to allow it to make equity investments in Fannie Mae and Freddie Mac. "It suggests a greater concern about how these companies are doing. It says the problems are deeper. It gets to the solvency of the companies, not just the liquidity." Senate Majority Leader Harry Reid, D-Nev., said "Senate Democrats stand ready to work with the administration to quickly and effectively address the situation currently facing these institution." Democratic presidential contender Barack Obama, 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 GOP leader John Boehner, R-Ohio, and Republican Whip Roy Blunt, R-Mo., said they "stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets." Officials from Treasury, the Fed and other regulators worked in close consultation throughout the weekend after growing investor fears about the companies' finances sent their shares and the overall market plummeting last week. Shares of Fannie Mae plunged 45 percent last week and are down 74 percent since the beginning of the year. Freddie Mac shares fell 47 percent last week, and have fallen 77 percent so far this year. A senior Treasury official said any increase in the line of credit -- now at $2.25 billion for each company -- would be at the Treasury secretary's discretion. The same would apply to any equity investment made by the government. The official, who spoke on condition of anonymity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday." The Fed's offer of funds is viewed as a temporary backstop until Treasury can get its plan in place. The collateral they would have to pledge -- Treasury securities and federal agency securities -- is more narrow than the collateral commercial banks and Wall Street firms must pledge for emergency lending privileges. Freddie Mac Chairman Richard Syron said Sunday that preliminary second-quarter results show that his company had "a substantial capital cushion" above the 20 percent minimum surplus it is required to maintain. Fannie Mae President and CEO Daniel Mudd said he believes the steps could send a calming message. "Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market. We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future." Last week Fed Chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, made a point of saying that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, has found both companies adequately capitalized. |
