So much for merely making reassuring noises, as the Wall Street Journal reported an hour or so ago.
Unless the authorities can call in favors and get a strong show of buyer interest at the Fannie sale of $3 billion sale of short-term debt tomorrow, it’s hard to imagine the markets will take well to Fannie and Freddie’s fate not being resolved.
Note also that contrary to earlier denials, Reuters reports that Bernanke did tell Fannie it could access the discount window (hat tip reader Dwight).
From Bloomberg:
Treasury Secretary Henry Paulson sought blanket authority from Congress to buy equity stakes in and lend to Fannie Mae and Freddie Mac, aiming to stem the collapse of confidence in the largest sources of U.S. mortgage financing.
Paulson will propose to Congress a “temporary” increase of the companies’ lines of credit with the Treasury from the current $2.25 billion each, and the right to buy equity “if needed,” according to a statement released by the department in Washington.
Freddie Mac is scheduled to sell $3 billion in short-term notes tomorrow, and Paulson’s comments indicate a growing concern that a crisis of confidence may take hold if demand for the debt is weak. The plan, which requires congressional approval, would give Paulson power to buy an unspecified amount of stock in Fannie Mae and Freddie Mac, a Treasury official told reporters.
A third element of the proposal would give the Federal Reserve a “consultative role” overseeing the companies’ capital requirements. The Fed separately announced it will let the companies borrow directly from the Fed at the same discount rate as commercial banks.
Debt sold by Fannie Mae and Freddie Mac “is held by financial institutions around the world,” Paulson said in the statement. “Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets.”…
“Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer,” Paulson said. “I look forward to working closely with congressional leaders to enact this legislation as soon as possible, as one complete package.”
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It is outrageous that the government would consider anything other than the most senior debt.
It is a direct transfer payment to banks and external funds from the taxpayer.
I don’t agree with the funding prior to a semi-nationalization, but how can they possibly justify such an action. I hope Paulson will be found to a LEGAL failure to manage his fudiciary responsibility.
Does this mean the Fed can purchase the $3 billion tomorrow? Will the public ever know if it is the fed bidding for the debt?
Ok, let me see now… If I could also tap a window at the Fed at 2.25%, then I could borrow the money to buy some of that $3 billion of paper that Fannie and Freddie need to sell. I could then take that paper and sell it at a discount somewhere, to somebody, and payoff the Fed and keep the difference…
On a serious note: Commendations to the blog, it was here that I first read, months and months and months ago, that Freddie and Fannie would eventually go belly up, the first tipoff being the “spreads” they were having to pay over Treasury debts, and then the fretting about the jumbo loans… Yep, still driving by to gawk at the accident, praying my children won’t be in the next collision I spectate….