US Government to secure mortgage market with gold reserves

The U.S. Treasury Department has promised “hundreds of billions” to save the US markets using its own gold reserves.

President Bush approved the use of existing authorities by Treasury secretary Hank Paulson to make available as necessary the assets of the Exchange Stabilisation Fund for up to $50 billion to buy more illiquid mortgage assets.

When the Government bailed out the the Government Sponsored Enterprises it promised to buy illiquid mortgage backed securities, but this announcement extends that pledge.

The ESF was created after the Great Depression and uses the US gold reserve as collateral for financial stability.

The plan will involve Fannie Mae and Freddie Mac increasing their purchases of mortgage assets. The Government will also expand its own purchase programme for mortgage backed assets, which was announced recently, to help increase the availability of capital for more mortgages.

Paulson says he will also work with Congress to create new legislation that will allow all mortgage backed securities to be bought up by the GSEs and the Government, instead of just those that fit within existing legislation.

This move is exactly what mortgage industry professionals have been calling for the UK Government to make. Earlier today, the Intermediary Mortgage Lenders Association urged the UK Government to take similar action. The Council of Mortgage Lenders also reiterated the call for help with illiquid assets.

Paulson said a press conference in Washington: “We are talking hundreds of billions of dollars, This needs to be big enough to make a real difference and get to the heart of the problem.”

“This morning we've taken a number of powerful tactical steps to increase confidence in the system.

“The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy.”

Paulson says the Government will buy the illiquid assets but he urged that “this troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible.”