In a dramatic statement released Sunday, the White House and Federal Reserve moved to give the mortgage giants the capital they need to survive the depression in the housing market and turmoil in financial markets that had left them dangling over a cliff.
Of most immediate importance, the Fed's board of governors voted to open up its emergency discount window to Fannie and Freddie.
In addition, Treasury Secretary Henry Paulson announced that he will seek Congressional authorization to by stock in the two companies and increase the government's credit line to them.
At the moment, each company may borrow only $2.25 billion.
In return for the capital, Paulson said that the Bush administration would ask Congress to grant the Fed a "consultative" role in the capital standards of the companies.
The housing rescue package that is nearing final approval by Congress would put in place a strong independent regulator for the companies is slowly moving through Congress. Paulson says he wants a new provision allowing the Fed to work hand-in-hand with the new agency.
That would be a bitter pill for Fannie and Freddie, which have been at loggerheads with the central bank over the capital issue for years.
It is not clear how Congress will react on Paulson's request. The Treasury secretary said he has been in close contact with the Congressional leadership over the weekend, so his request will not come as a surprise to lawmakers.
It would be logical to attach the lifeboat for Fannie and Freddie to the housing rescue measure.
The Senate passed its version of the legislation last week and sent it back to the House of another vote. It is expected to get to President Bush for his signature before Congress leaves town for its summer recess at the beginning of August.
Stability is the goal
White House Press Secretary Dana Perino in a statement that the plan "will help add stability during this period."
Paulson said the global reach of Fannie (FNM:
necessitated unprecedented action.
"GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets," Paulson said.
For years, Wall Street has believed that the government would never allow Fannie and Freddie to default. The companies have been able to sell debt at lower prices than their competition.
But the agencies have grown to mammoth size. They own or guarantee $5.2 trillion of U.S. home mortgages.
Investors have fled their stock in recent months as the housing market downturn and financial market turmoil have shown no sign of ending.
In the past week, the selling intensified and Freddie and Fannie each lost half their value in volatile stock trading. Talk of some form of government action rose as the week went on.
In prepared statements, Fannie and Freddie said they welcomed the steps outlined by the Treasury and the Fed, while insisting that they were adequately capitalized.
Robert Mudd, the CEO of Fannie Mae, said the option to use the discount window should restore confidence of its stakeholders.
Richard Syron, the CEO of Freddie Mac, said the company's quarterly results that are being finalized and would show "we have a substantial capital cushion above the 20% mandatory target surplus established by our regulator."
James Lockhart, the head of the Office of Federal Housing Enterprise Oversight (OFHEO) that regulates Fannie and Freddie, stressed that the two firms can survive.
The two firms have "$95 billion in total capital, their substantial cash and liquidity portfolios, and their experienced management serve as strong supports for the Enterprises' continued operations," he said in a statement. End of Story
Greg Robb is a senior reporter for MarketWatch in Washington.
