Fannie and Freddie Potential Bail Out
The White House released a statement on Sunday for Fed Secretary Henry Paulson to work directly with Congress. Secretary Henry Paulson said he is seeking the authority from Congress for the Federal Reserve Bank of New York to lend funds to the two companies at 2.2 percent at the same rate given to commercial banks and larger Wall Street firms. Congress will not seek to limit the line of credit. The Fed plan also involves a new regulatory role for consulting and setting new capital requirements for Freddie and Fannie to encourage home mortgages once again.
Senator Christopher Dodd (D-Connecticut), Chairman of the Senate Banking Committee said today that the Bush administration’s actions were on the “right track.” The Financial Services Committee Chairman of the House, Barney Frank (D-Massachusetts) said that the entire package would unfold by the end of the week providing clearance to be signed by President Bush. The package will include a foreclosure rescue with government-backed mortgages through the Federal Housing Administration creating new tighter controls for the two companies.
Fannie and Freddie hold half of the mortgages in the United States. There is mixed emotion on Wall Street concerning whether the Feds role of playing “catch up” is actually capable of causing damage to other financial markets since the government is stepping in as what investors see as a guarantor position. The Fed denies that the position will be that of a guarantor.
A critical test of confidence will come Monday morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities. Republican Presidential candidate John McCain believes the actions announced Sunday “are consistent with the goal of providing support for a path through the present constraint toward steps that include regulatory reform, market discipline and mission focus.”
Democratic Presidential nominee Barack Obama said the government’s main concern should be “to make sure that home ownership remains attainable and affordable for American families. Second, any measures should protect taxpayers and not bailout the shareholders and management of Fannie Mae and Freddie Mac.”
