In Morgan Stantley's Global Economic Forum Richard Berner & David Greenlaw discuss the three part plan by the Fed, announced over the weekend, for Government-Sponsored Enterprises (GSEs). The highlights of the plan are excerpted below:
Three-part plan from Fed and Treasury. Faced with losses and concerns about credit quality, GSEs may face short-term liquidity and longer-term capital-access constraints. To mitigate those headwinds, the Fed and Treasury announced over the weekend a three-part plan. The Fed and the Treasury will provide the GSEs with liquidity, and the Treasury will also temporarily provide them with capital. Here are the details:
(1) The Treasury seeks to expand its line of credit (LOC) to the GSEs, with terms and conditions to be specified. Congress must approve this LOC.
(2) Pending Congressional approval of the Treasury LOC, the Fed will supplement that facility by giving the GSEs immediate access to the primary credit facility − the Fed’s discount window. The Fed already is empowered to accept agency MBS as collateral for such borrowing, and under Section 13(13) of the Federal Reserve Act it has power to make 90-day loans to the GSEs.
(3) The Treasury is also seeking temporary authority to purchase equity in either of the two GSEs if needed. Congress must approve this authority.
The clear intent of this plan is to buy time for the GSEs by offering a backstop of conditional support that rules out failure. Indeed, on Monday the Treasury Department issued a two-sentence clarification of the initial proposal highlighting the fact that while the Treasury would like to have the authority to inject capital into the GSEs, this is intended to serve as a “backstop” that will only be tapped on an “if-needed” basis. The authorities probably want the GSEs to raise additional capital and want Congress to hammer out final details on the GSE reform legislation that is now pending.