Fannie and Freddie Bailout Plan Emerges

July 14, 2008 No Comments »

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Treasury Secretary Henry Paulson unveiled a plan Sunday aimed at buoying ailing mortgage financiers Fannie Mae and Freddie Mac, which are clearly too important to fail.

“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 three-pronged approach, which is the result of collaboration between the Federal Reserve, the OFHEO, and the SEC, will address immediate liquidity and capital needs, as well as protect the pair going forward.

First, in a bid to boost liquidity, the GSEs will be granted a temporary increase in the line of credit they have with the Treasury, an undisclosed amount above their current $2.25 billion each.

Secondly, the plan provides temporary authority for the Treasury to purchase equity in either of the two companies if needed to ensure they have sufficient capital.

And finally, to protect Fannie and Freddie in the long run, the Federal Reserve will play a consultative role in setting capital requirements and other safety standards for the GSEs as part of their regulatory reform legislation currently moving through Congress.

The Federal Reserve also announced Sunday that it had granted the Federal Reserve Bank of New York the authority to lend to both companies should they need require it.

Shares of both mortgage financiers plummeted more than 45 percent last week as investors feared the pair were undercapitalized.

(photo: mjphoto)

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