US government bails out mortgage giants

Under the rescue plan, Congress will be asked to pass legislation to increase the line of credit to Fannie and Freddiethe amount and terms to be decided lateras well as providing the authority for the government to purchase equity if needed. In addition, the Federal Reserve Board has granted the Federal Reserve Bank of New York authority to lend directly to the two companies should such lending prove necessary.

Announcing the measures after a weekend of hectic discussions with bankers, financial institutions and Congressional leaders, Treasury Secretary Henry Paulson said the two companies played a central role in our housing finance system and their support for the housing market is particularly important as we work through the current housing correction. There were fears that had the intervention not been made Freddie Mac may have had difficulty in a planned sell-off of $3 billion in debt scheduled for today.

Like the Bear Stearns rescue operation in March, the timing of the announcement was meant to allay fears before global markets opened for the week. Paulson said the international reach of the two government sponsored enterprises (GSE) necessitated the 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, he said.

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