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Feds Move To Reassure Fannie, Freddie Investors

Days after insisting that a bailout of Fannie Mae and Freddie Mac wasn't necessary, the Bush administration has announced an unprecedented plan to support the mortgage giants.

Regulators unveiled steps Sunday night aimed at reassuring investors that the companies are still healthy. That's important to American homebuyers because Fannie Mae and Freddie Mac own or guarantee nearly half of the mortgages issued in the United States.

But the mortgage finance companies have suffered big losses, and there is concern that they might need more capital.


Just as they did when they bailed out Bear Stearns in March, regulators waited until early Sunday evening to announce the rescue of Fannie Mae and Freddie Mac. The announcement came just in time for the opening of the Asian stock markets and hours before an auction of Freddie Mac securities. The goal was to stop the erosion of investor confidence in the companies.

Treasury Secretary Henry Paulson said Fannie Mae and Freddie Mac play a critical role in the housing market.

"Their support for the housing market is particularly important as we work through the current housing correction," he said.

Paulson had spent much of last week trying to convince investors that the companies were in good shape and that no rescue plan was needed. Sunday night, he shifted gears. Under the plan he announced, the companies would be allowed to borrow from the Federal Reserve's discount lending window if they need to.

The Treasury Department said it would ask Congress for permission to buy shares of the companies' stock. It also increased the line of credit available to them. The message to investors was that the companies have all the money they need and aren't going to collapse anytime soon, so they shouldn't be afraid to buy their securities.


Banking consultant Bert Ely said Fannie Mae and Freddie Mac typically hold huge amounts of debt.

"Keep in mind that as of March 31, the two companies combined had over $500 billion of short-term debt outstanding," Ely said. "That's a huge amount of money that they have to keep rolling over. It works out to, you know, an average of $40 [billion] or $50 billion a month."

Ely said if the companies can't persuade investors to give them money, they have no way of paying off that debt.

As sweeping as the changes appeared, regulators left a lot of questions unanswered — questions that Congress will have to wrestle with.

Fannie Mae and Freddie Mac have long been strange hybrid animals. They are owned by shareholders like a lot of other companies, but they are chartered by the government. But if the government can rush in to bail them out, what does that say about them?

Ely noted that Congress is already working on legislation to beef up regulatory oversight of the firms. And Ely said the bailout plan can only make it tougher to reach agreement.

"It raises lots of questions, and they would be questions in any circumstance, but these are complicating questions that get fed into an already complicated piece of legislation," he said.

Vince Reinhardt, an economist with the American Enterprise Institute, agreed that there are big questions about how the bailout will work. For instance, if the Treasury Department is allowed to buy Fannie Mae's stock, will its shares be just like anyone else's? Or will they have some kind of preferred status? And Reinhardt said as long as those questions are unanswered, investors may be reluctant to come on board.

"The endgame hasn't been spelled out — exactly how will they get capital injected, what will the treatment of other creditors be — and those uncertainties, until there's a final resolution, will weigh on investors' decisions," Reinhardt said.

But regulators had little time to work out the details. The bailout was conceived and carried out on the fly — an effort to respond to pressures that seemed to morph overnight. As bad as the mortgage crisis has been so far, a collapse of Fannie Mae and Freddie Mac would be much worse, and the government's main goal right now is to prevent that from happening.

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