WASHINGTON - The US Treasury Department and Federal Reserve last night announced sweeping measures to lend money and buy stocks if necessary in embattled mortgage lenders Fannie Mae and Freddie Mac.
Acting before a key $3 billion sale today of short-term debt by Freddie Mac, Treasury and the Fed unveiled a series of measures that made clear they want the shareholder-owned lenders to continue their pivotal role in US financial and housing markets and to remain in private hands.
US stock index futures and the dollar rose after the announcement. "[Their] 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," treasury secretary Henry Paulson said in a statement.
A senior Treasury official told reporters in a conference call the moves were not driven by any deterioration in market conditions since Friday, when stocks of the
two companies, known as government-sponsored enterprises, were driven lower.
He said policymakers had consulted closely over the weekend and added it "makes sense" to take the actions announced.
Treasury said its plans included a temporary increase in the line of credit that the GSEs now have with Treasury, up to an amount to be determined by Mr Paulson.
The current credit line for each lender is $2.25 billion. In addition, "to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed," Treasury said.
The Treasury official said all the actions it proposed need Congressional approval but expressed confidence that could be secured within this week.
On top of those dramatic steps, the Fed announced it was opening the discount window to Fannie and Freddie - offering them credit at the current discount rate of 2.25 per cent from the emergency lending facility if needed.
"This authorisation is intended to supplement the Treasury's existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during aperiod of stress in financial markets," the US central bank said.
Both companies' share prices have plummeted in recent weeks from year-ago levels, raising fears about their viability and capitalisation. The US Securities and Exchange Commission underlined regulators' heightened state of alert by taking the unusual step of choosing a Sunday to announce a crackdown on the spreading of false market rumours.
The move comes after weeks in which shares in several financial firms - including Lehman Brothers - have been targeted by a flurry of rumours over their financial health. Lehman and others denied those rumours but that did little to prevent a sharp sell-off in their stocks.
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