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Fannie, Freddie Rescue Planned

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By STEPHEN LABATON

The New York Times

Published: July 14, 2008

WASHINGTON - Alarmed by the sharply eroding confidence in the nation's two largest mortgage finance companies, the Bush administration Sunday 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 it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac.

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. In 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 Sunday 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 Sunday 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."

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 that they had little choice. During 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.

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 either 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.

Half Of Nation's Mortgages Held

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 only about $15 billion in outstanding debt. It now has total 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, about 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.

Key Democrats Approve

Initial reaction to the plan by some congressional Democrats was positive.

An early endorsement came from Sen. Charles E. Schumer, D-N.Y., 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 U.S. 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."

Rep. Barney Frank, D-Mass., 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 likely land on the president's desk by the end of the week.

The administration's announcement was made after senior officials from the Treasury and the Federal Reserve spent Saturday and Sunday closely monitoring preparations by Freddie Mac to raise money to help meet its short-term financing needs. A senior official said the administration had been receiving mixed signals from Wall Street about today's auction.

Daniel H. Mudd, the president and chief executive of Fannie Mae, said Sunday that the company "appreciates today's announcements and the expressions of support."

Richard F. Syron, chief executive of Freddie Mac, said the plan "should go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America's homebuyers and renters."

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