In a letter to Sen. Charles Schumer released Wednesday, Fed Chairman Ben Bernanke said that "the Federal Reserve has... taken steps to increase liquidity in the markets.... Also, the Federal Open Market Committee has stated that it is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets." However, Bernanke said it was unnecessary to relax portfolio limits on Fannie Mae and Freddie Mac. The regulator for the two government-sponsored enterprises [GSE] rejected requests August 10th to allow them to buy more home loans to help avoid a credit crunch. In his letter, Mr. Bernanke wrote: "The GSEs should be encouraged to provide products for subprime borrowers to the extent permitted by their charters. The current caps on GSE portfolios -– which were imposed for safety and soundness reasons -- need not be lifted to allow them to accommodate new borrowers. Currently, the GSE portfolios include substantial holdings of GSE-guaranteed mortgage products, which are easily placed in the private secondary market even under current conditions." The letter helped drive the S&P 500 up 2.2% Wednesday. Fannie Mae shares rose 3.4%, while Freddie Mac shares climbed 3.3%.
Sources: Schumer Letter, Bernanke Letter, Bloomberg, Wall Street Journal
Commentary: Markets Watch the Fed — What Does the Fed Watch? • Schumer Enlists "Big Four" To Fix Subprime Problem
Stocks/ETFs to watch: FRE, FNM
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