US moves to protect Fannie and Freddie

WASHINGTON DC – Despite reassurances from the US Treasury last week, Treasury secretary Henry Paulson has acted to boost confidence in government mortgage financers Fannie Mae and Freddie Mac by extending Treasury lines of credit and giving the Federal Reserve a consultative role in regulating the government-sponsored enterprises (GSE).

In a prepared statement, Paulson emphasised the importance of Fannie and Freddie’s support for the housing market and stressed they should not be allowed to fail. “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. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.”

Paulson has introduced a three-part plan to help strengthen the entities. The first part concerns providing a liquidity backstop, the second includes temporary authority for the Treasury to purchase equity in either of the two GSEs if needed. The third concerns giving the Federal Reserve new oversight for the stability of the two firms. “To protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.”

This new role will cement the Fed as the lead agency in ensuring financial market stability in the US – just as outlined in the Treasury’s March Blueprint.