US tries to rescue mortgage giants
Fannie and Freddie would get billions; Congressional action could come this week
WASHINGTON - Alarmed by the sharply eroding confidence in the nation's two largest mortgage finance companies, the Bush administration yesterday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.
In a separate announcement, the Federal Reserve said that it would make one of its short-term lending programs available to the two companies,
An official said the Fed's lending program was approved at the request of the Treasury, but that it was temporary and would probably end once Congress approved the Treasury's plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.
It was the second time in four months that the housing crisis had prompted the government to step in and rescue a major financial institution. Last March, the Treasury Department engineered the sale of Bear Stearns to prevent it from going into bankruptcy and causing a shock to the financial system.
The administration's plan was disclosed yesterday evening to calm jittery markets overseas and on Wall Street in advance of a debt sale by Freddie Mac this morning.
Officials said that after talking to senior lawmakers through the weekend, they expected that Congress would attach the proposals to a housing bill that could be completed and sent to the White House for approval as early as this week.
"The president has asked me to work with Congress to act on this plan immediately," the Treasury secretary, Henry M. Paulson Jr., said yesterday on the steps of the Treasury building. "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction."
While senior Democratic and Republican officials in successive administrations have for many years repeatedly denied that the trillions of dollars of debt they issued is guaranteed, the package, if adopted, would bring the Treasury closer than ever to exposing taxpayers to potentially huge, new liabilities.
Officials seemed to suggest, however, that they had little choice. Over the weekend, Treasury officials sought assurances from Wall Street firms that a $3 billion auction by Freddie Mac of short-term debt would go off without a hitch. While $3 billion is a relatively small sum for an institution of Freddie's size, officials said they did not want to risk even a small misstep that could set off a new round of problems.
The failure of just one of the companies could be catastrophic for economies around the world. The companies, known as government-sponsored enterprises, touch nearly half of the nation's mortgages by owning or guaranteeing them, and the debt securities they issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds, big companies, and other large institutional investors.
"GSE debt is held by financial institutions around the world," Paulson said in a statement. "Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure."
The proposal would give the Treasury secretary authority to determine when to invest in the companies or extend loans to them.
Those purchases would be made with the agreement of the companies.
Officials said the proposed investment and lending elements of the plan were to last two years.
While the Treasury did not specify the size of the packages, officials briefed on the plan said they were told by administration officials that, to be meaningful, Congress should consider extending the line of credit to the two institutions to $300 billion.
Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had about $15 billion in outstanding debt.
It now has debt of about $800 billion, while Freddie has about $740 billion. Today the two companies also hold or guarantee mortgages valued at more than $5 trillion, roughly half of the nation's mortgages.
Lawmakers said that as part of the plan, the administration called on Congress to raise the national debt limit.
And it asked Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold.
Giving the Fed a consulting role in the companies' oversight is seen as yet another way to reassure nervous markets.
Initial reaction to the plan by some congressional Democrats was positive.
An early endorsement came from Senator Charles E. Schumer, Democrat of New York, who is also a senior member of the banking committee.
"The Treasury's plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to US taxpayers," Schumer said. "While Fannie and Freddie still have solid fundamentals, it will be reassuring to investors, bondholders, and mortgage-holders that the federal government will be behind these agencies should it be needed."
Representative Barney Frank, Democrat of Massachusetts and one of the authors of the housing legislation, said he supported the Treasury proposal. He said he expected the plan would be included in the housing bill, which he said would be approved, sent back to the Senate, and probably land on the president's desk by the end of the week.
"The general thrust of what they're doing is right," said Frank, chairman of the House Financial Services Committee.
Senator Barack Obama of Illinois, the presumptive Democratic presidential nominee, told reporters in San Diego yesterday that any government action to rescue the two mortgage companies should be done from the perspective of homeowners, "not just shareholders and investors and CEOs of companies."
His presumed Republican opponent, Senator John McCain of Arizona, said last week that he expected the government would do everything in its power to prevent the failure of either company.
