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Treasury, Fed Propose Safety Net for Mortgage Giants

Congress must soon decide on a U.S. Treasury-Federal Reserve measure to save mortgage giants Freddie Mac and Fannie Mae from further crisis. An economics editor and House Financial Committee members weigh the options.

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  • RAY SUAREZ:

    We begin with a look at the government's emergency plan for boosting two now-shaky pillars of the housing and financial markets.

    The rescue plan announced yesterday by Treasury Secretary Henry Paulson amounts to what could be an unprecedented intervention by the government to help stabilize the finances of mortgage giants Fannie Mae and Freddie Mac.

  • HENRY PAULSON, U.S. Treasury Secretary:

    … Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies.

  • RAY SUAREZ:

    The companies lost half their value last week as investors lost faith that Fannie or Freddie had enough cash reserves on hand to continue buying mortgages.

    The health of both companies is pivotal, since they hold or guarantee roughly $5 trillion of mortgage debt, more than half the total mortgage debt in the United States.

    The companies are government-sponsored enterprises, or GSEs, created by an act of Congress, but traded and owned by investors.

    Under the plan, the Treasury would seek to expand its line of credit to the companies by billions of dollars so they could finance new mortgages. It also allows the government to buy shares of Freddie and Fannie if needed.

  • HENRY PAULSON:

    As a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

  • RAY SUAREZ:

    The Federal Reserve's directors also voted yesterday to allow Freddie and Fannie to borrow money from the Fed for the first time. They'd pay the same interest rate given commercial banks, 2.25 percent.

    Before the Treasury can extend credit to the companies, Congress must approve.

    And joining us once again to help us understand the moves by the Treasury Department and the Federal Reserve, we're joined by David Wessel, economics editor for the Wall Street Journal.