WSJ: Treasury and Fed Pledge Aid for GSEs

Includes: FMCC, FNMA
by: Wall Street Weather

The Federal Reserve just issued a statement giving the Federal Reserve Bank of New York the ability to lend to Fannie Mae (FNM) and Freddie Mac (FRE) “should such lending prove necessary. Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities.”

Fannie’s President and CEO also issued a statement reiterating that:

We continue to hold more than adequate capital reserves and maintain access to liquidity from the capital markets.

That information is what has been officially confirmed. An article appearing on The Wall Street Journal’s site yesterday evening is reporting that the Treasury announced the following plans to help the government-sponsored entities (GSEs). Since nothing has been posted on the Treasury Department’s website this evening, here is a summary of what the Journal is reporting that Treasury plans to do. While the Journal probably has good sources at Treasury, keep in mind that the following information has not been officially confirmed:

Seek approval from Congress for an increase in their line of credit with the Treasury, currently capped at $2.25 billion. The Treasury did not state the amount of increase they are recommending. Congress is currently in the middle of negotiations for final approval of the housing bill, so Treasury trying to get this passed through insertion into the bill or separately, will be challenging.

Seek temporary authority so the Treasury could buy equity in either GSE “if needed” to ensure they have “sufficient capital to continue to serve their mission.” The line of credit and liquidity backstop would be temporarily available, potentially for up to 18 months.

Seek provision to give the Fed a “consultative role” in setting capital requirements and other “prudential standards” (which are not described in the article).

The Journal quotes a Treasury source who said “As we’ve watched market developments we decided it was time for policymakers to act.”

Clearly yesterday’s actions put building confidence way above any “moral hazard” concerns. I don’t know if this was because Treasury could not act without Congress, but at least for the time being, the GSE stockholders achieved a temporary reprieve. Let’s see where Fannie & Freddie’s political muscle take this.

Disclosure: I bought FNM & FRE shares just after Friday’s open. We’ll see if that was a momentary lapse of reason or not.

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