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AVOIDING A MELTDOWN

The Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.

The steps are also intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent credit market troubles from engulfing financial markets and further weakening the economy.

If one or both of the companies were to fail, it would wreak havoc on the already fragile financial system and the crippled housing market. The problems would spill over in the national economy, too.

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies if necessary. They would pay 2.25 percent for any borrowed funds – the same rate given to commercial banks.

The Fed said that should help the companies provide credit in tough times.

Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies should they need to tap it and to make an equity investment in the companies, if needed.

“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-owner companies,” Paulson said Sunday. “Their support for the housing market is particularly important as we work through the current housing correction.”

The Treasury's plan also seeks a “consultative role” for the Fed in any new regulatory framework decided by Congress for Fannie and Freddie.

The White House, in a statement, said it believed the plan outlined by Paulson “will help add stability during this period.” The White House said President Bush directed Paulson to “immediately work with Congress” to get the plan enacted.

Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States.

Fannie was created by the government in 1938 to provide more Americans the chance to own a home by giving financial institutions an outlet to sell mortgage loans they originated, freeing more cash to make more home loans. It moved from government to public ownership in 1968 and Freddie was started two years later.

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. “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.”

The announcement marked the latest move by the government to bolster confidence in the mortgage companies. A critical test of confidence will come this morning, when Freddie Mac is slated to auction $3 billion in short-term debt.

“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,” said Sen. Charles Schumer, D-N.Y.

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.

“While there are certain to be cries that these actions amount to another bailout, people need to be aware of just who is being bailed out,” said senior Wachovia economist Mark Vitner. “Shareholders of these two entities have already taken a beating and the Treasury and Fed have no intention of bailing them out. The bailout is for the housing market and the broader U.S. economy.”

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.

The Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.

The steps are also intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent credit market troubles from engulfing financial markets and further weakening the economy.

If one or both of the companies were to fail, it would wreak havoc on the already fragile financial system and the crippled housing market. The problems would spill over in the national economy, too.

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies if necessary. They would pay 2.25 percent for any borrowed funds – the same rate given to commercial banks.

The Fed said that should help the companies provide credit in tough times.

Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies should they need to tap it and to make an equity investment in the companies, if needed.

“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-owner companies,” Paulson said Sunday. “Their support for the housing market is particularly important as we work through the current housing correction.”

The Treasury's plan also seeks a “consultative role” for the Fed in any new regulatory framework decided by Congress for Fannie and Freddie.

The White House, in a statement, said it believed the plan outlined by Paulson “will help add stability during this period.” The White House said President Bush directed Paulson to “immediately work with Congress” to get the plan enacted.

Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States.

Fannie was created by the government in 1938 to provide more Americans the chance to own a home by giving financial institutions an outlet to sell mortgage loans they originated, freeing more cash to make more home loans. It moved from government to public ownership in 1968 and Freddie was started two years later.

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. “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.”

The announcement marked the latest move by the government to bolster confidence in the mortgage companies. A critical test of confidence will come this morning, when Freddie Mac is slated to auction $3 billion in short-term debt.

“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,” said Sen. Charles Schumer, D-N.Y.

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.

“While there are certain to be cries that these actions amount to another bailout, people need to be aware of just who is being bailed out,” said senior Wachovia economist Mark Vitner. “Shareholders of these two entities have already taken a beating and the Treasury and Fed have no intention of bailing them out. The bailout is for the housing market and the broader U.S. economy.”

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.

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