White House, Fed will rescue Fannie, Freddie from the housing depression

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In a dramatic statement released Sunday, the White House and Federal Reserve moved to give the mortgage giants the capital they need to survive the depression in the housing market and turmoil in financial markets that had left them dangling over a cliff.

Of most immediate importance, the Fed's board of governors voted to open up its emergency discount window to Fannie and Freddie.

In addition, Treasury Secretary Henry Paulson announced that he will seek Congressional authorization to by stock in the two companies and increase the government's credit line.

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In return for the capital, Paulson said that the Bush administration would ask Congress to grant the Fed a "consultative" role in the capital standards of the companies.

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It is not clear how Congress will react to Paulson's request. The Treasury secretary said he has been in close contact with the Congressional leadership over the weekend, so his request will not come as a surprise to lawmakers.

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Paulson said the global reach of Fannie Mae necessitated unprecedented action.

"GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets," Paulson said.

"The problems with Fannie Mae and Freddie Mac are pretty straightforward. Combined, the two GSEs have about $95 billion in capital but hold over $ 5 trillion in mortgages. With home prices falling and mortgage delinquencies rising, doubts are beginning to surface as to whether or not they have enough capital to ride out the housing slump. The math is pretty daunting," said Mark Vitner, senior economist at Wachovia.

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Peter Schiff, president of Euro Pacific Capital, predicted that the package would put downside pressure on the dollar. He said letting the two firms collapse was preferable to a bailout and said the package announced amounted to sticking a finger into a leaking dam that was going to burst one way or another.

http://www.marketwatch.com/news/story/whit...printMidSection