UPDATE:US Announces Moves To Bolster Fannie Mae, Freddie Mac

djones






(Updates with Federal Reserve announcement on discount window lending; adds
background.)



By Michael R. Crittenden and Brian Blackstone


Of DOW JONES NEWSWIRES



WASHINGTON -(Dow Jones)- U.S. financial regulators, in a dramatic step to help
stabilize ailing Fannie Mae (FNM) and Freddie Mac (FRE), will allow the firms to
borrow directly from the Federal Reserve and have proposed giving the Treasury
Department the authority to take an equity stake in the companies.


In separate Sunday evening announcements, the Treasury and Fed made clear that
the federal government sees it necessary to help the firms, which have seen
their shares plummet over the last week amid fears about their solvency.
Treasury Secretary Henry noted in a statement the debt of the two government-
sponsored enterprises is held by investors around the world.


"Its continued strength is important to maintaining confidence and stability
in our financial system and our financial markets," Paulson said. "Therefore we
must take steps to address the current situation as we move to a stronger
regulatory structure."


The Fed's Board of Governors "has granted the Federal Reserve Bank of New York
the authority to lend to Fannie Mae and Freddie Mac should such lending prove
necessary," the Fed said in a statement.


"Any lending would be at the primary credit rate," the Fed added. The primary
credit rate, also known as the discount rate, is currently 2.25%.


"This authorization 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 a period of stress in
financial markets," the Fed said.


The Treasury proposal, which would require approval by Congress, calls for a
temporary increase in the $2.25 billion line of credit each of the two GSEs can
draw on from the federal government. A senior Treasury official declined to say
how large the new line of credit would be, saying only that it would be
temporary - probably 18 months - and that the size, terms and conditions would
be at the discretion of the Treasury secretary.


The proposal would also give the Treasury the discretion to purchase an equity
stake in either firm if it's deemed necessary. The senior treasury official said
the details of such a purchase, if necessary, would be determined at that time
in consultation with the two firms. He declined to say the potential form of
such a purchase, whether it be preferred stock or some other form of equity, or
whether it would have the potential to dilute the holdings of current company
stockholders.


"Use of either the line of credit or the equity investment would carry terms
and conditions necessary to protect the taxpayer," Paulson said in his
statement.


The action marks the second time in four months that the Fed has broadened use
of the discount window on a Sunday to avert financial contagion.


In March, the Fed granted primary dealers access to the discount window - a
privilege once restricted to tightly regulated commercial banks - in the wake of
the failure of Bear Stearns.


That program, the primary dealer credit facility, is due to expire in
September, though Fed Chairman Ben Bernanke has said it may be extended.


The senior Treasury official said that nothing has occurred since Friday to
act as a catalyst for the extraordinary moves. Rather, policymakers deemed it
necessary given the precipitous declines in the companies' share prices last
week and their potential to roil financial markets worldwide.


Asian central banks and financial institutions are major holders of U.S. debt
and are believed to own substantial portions of debt for Fannie Mae and Freddie
Mac. According to the U.S. Treasury Department's latest data, foreigners owned
21.4%, or $1.3 trillion, of the total outstanding long-term debt issued by U.S.
government agencies as of June 2007. China and Japan were by far the largest
investors in such securities, holding $376 billion and $229 billion,
respectively. It isn't clear how much debt either country owns from Fannie and
Freddie specifically.


Longer term, the Treasury plan calls for the Federal Reserve to be given a
consultative role in determining the firms' capital requirements and other
standards.


The three-part Treasury plan is expected to be inserted into a broad package
of housing legislation currently moving through Congress. The senior Treasury
official said the hope is that the changes can be made and the legislation
passed by the House and Senate and sent to President George W. Bush this week.



-By Michael R. Crittenden and Brian Blackstone, Dow Jones Newswires; (202)
862-9273; michael.crittenden@dowjones.com