U.S. Announces Plan To Shore Up Fannie, Freddie

Treasury Secretary Henry Paulson announced a sweeping financial package Sunday designed to shore up the country's ailing mortgage giants, Fannie Mae and Freddie Mac. The measures would allow the government to lend money to the two companies — and to buy their stock, if necessary.

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ANDREA SEABROOK, host:

From NPR News, it's ALL THINGS CONSIDERED. I'm Andrea Seabrook. This could be another bruising week for the nation's financial markets. The biggest bruisers, or maybe the bruised, mortgage giants Fannie Mae and Freddie Mac. The two companies' share prices took a dive last week because of worries about their financial condition, and there's nothing to suggest the turbulence is over.

NPR's Jim Zarroli joins me now. Jim, last week was a nightmare for these companies and the people who own their stock, so what's going to happen tomorrow?

JIM ZARROLI: Well, very basically, you know, this week I think one of two things is going to happen. On the one hand, we could see the government regulators begin to get control of the situation, meaning they'll be able to assure or reassure the markets that these companies have enough capital to keep doing business, and this is a matter of psychology as much as anything else.

You probably remember that in March, Bear Stearns collapsed. The Federal Reserve was able to come in and offer loans to other investment banks, and that had the purpose of reassuring the markets that we weren't in a financial meltdown.

The problem is that the Bush administration and the Fed have tried to reassure everybody that Fannie Mae and Freddie Mac are doing okay. It hasn't succeeded so far. If these efforts don't work, the Fed and the administration are going to have to try more-drastic measures, perhaps some kind of bailout.

SEABROOK: So is there a point when we'll know things have settled down?

ZARROLI: We probably won't know for a while, but there will be an early sign tomorrow. Freddie Mac is supposed to sell $3 billion in securities. Now, these companies do this all the time. They sell securities, so they raise money, they use the money to buy mortgages from banks, which is their job. They're supposed to buy mortgages so the banks feel like it's safer to lend.

The fact is that timing is everything. So people are going to look at tomorrow's sale as kind of a barometer of how secure the companies are. If the sale goes well and enough investors are willing to buy these securities, it sends a message that these institutions can regain their footing. Things won't be so bad.

If the sale is disappointing, it's going to have the opposite effect, maybe send the share price down. That would really be devastating because as I said, these companies, these companies are really at the heart of the mortgage industry, especially right now, when we have a lot of mortgage lenders scared to lend.

SEABROOK: What do you mean by if the sale doesn't go well?

ZARROLI: Well, if they don't sell as much as they're hoping. This is a scenario that the Washington Post wrote about today. It said that the Treasury Department and the Fed were basically on the phone all week looking at what they could do to prop up these companies if the auction doesn't go well.

One thing they can do is rush in and buy securities themselves. The Fed can also decide that it's going to open its discount lending window to Fannie Mae and Freddie Mac. In other words, it would make money available to them to reassure people that they have enough capital to do business.

The problem is that nothing has really stopped this kind of gradual unfolding of the financial crisis we're in. We seem to take one step forward and two steps back. So the question really is, again, whether the government can try to turn things around.

SEABROOK: And I read that Fannie and Freddie own 40 percent of the mortgages on the market between them.

ZARROLI: What's often said is that they guarantee or own outright half of the mortgages that are issued in this country. So it's just a tremendous force in the mortgage industry.

SEABROOK: Big, big deal. NPR's Jim Zarroli. Thanks very much, Jim.

ZARROLI: You're welcome.

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