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It could prove to be the biggest bailout in American financial history. Today, the federal government unveiled its plans to rescue the troubled mortgage giants Fannie Mae and Freddie Mac. The government will take over the companies and will also pump enough capital into their balance sheets to keep them solvent. Treasury Secretary Henry Paulson says the government had to jump in because the companies' troubles were crippling the housing market and posing risks for the economy as a whole.
NPR's Jim Zarroli reports.
JIM ZARROLI: U.S. officials made clear today that they had no choice but to act and to act quickly. Secretary Paulson said Fannie Mae and Freddie Mac are so large and so interwoven in the nation's financial system that letting them fail would cause turmoil in financial markets both here and abroad.
Secretary HENRY PAULSON (U.S. Treasury Department): A failure would affect the ability of Americans to get home loans, auto loans, and other consumer credit and business finance. And a failure would be horrible to economic growth and job creation. That is why we have taken these actions today.
ZARROLI: Those actions amount to a government seizure of two of the pillars of the U.S. housing market. Under the plan announced today, the government said it would begin acquiring shares of the companies. It will also set up a temporary credit facility to lend them money if they need it. The Treasury Department can do this because Congress said so.
It voted in July to let the Treasury Department invest in the companies if necessary. U.S. officials had first hoped that such a move would be unnecessary and that the financial markets would stabilize on their own. But economist Vincent Reinhart of the American Enterprise Institute said the company's position has deteriorated so much that their troubles can no longer be ignored.
Mr. VINCENT REINHART (American Enterprise Institute): Their portfolio, because the real estate market has cratered so significantly, its portfolio is suspect. It needs more capital. And so ultimately, the secretary has to write that blank, you know, write on that blank check.
ZARROLI: The plan unveiled today will also change the way Fannie Mae and Freddie Mac are managed. They will be placed in a conservatorship and will be run by their regulator, the Federal Housing Finance Agency. The companies' CEOs will be replaced, though both have been asked to stay on to help with the transition. Instead of answering to shareholders, the companies will answer to the government.
James Lockhart is director of the Federal Housing Finance Agency.
Mr. JAMES LOCKHART (Director, Federal Housing Finance Agency): Conservatorship will give the enterprises the time to restore the balances between safety and soundness and mission, to be able to provide affordable housing, and stability and liquidity to the mortgage markets.
ZARROLI: U.S. officials said they see this plan as temporary. They also said they hope to see Fannie Mae and Freddie Mac get smaller down the road. They'll be able to keep buying up more and more mortgages until next year. But then U.S. officials hope they'll begin to pare down the number of mortgages they buy and let the private sector take over the role they play. Officials also note that the uncertainty around the companies has helped drive up mortgage rates higher than they would otherwise be.
If the situation stabilizes, they say rates should start to come down. Economist Sung Won Sohn of California State University at Fullerton says that may be true, but he says there are also big risks to what the Bush administration is doing. He says however much this ends up costing, the U.S. government is essentially agreeing to take on more debt.
Mr. SUNG WON SOHN (Economist): Market's perception is that U.S. Treasury is now backing the Fannie and Freddie; the ventures. And we're talking about trillions of dollars of debt, and that on top of, you know, a lot of trillions of dollars that U.S. Treasury has on its own.
ZARROLI: Sohn says that will make many foreign investors more nervous about buying U.S. Treasury bills, which can only push up interest rates and make it more expensive for the U.S. to borrow money. But as this financial crisis has unfolded, U.S. officials have been forced to think on their feet. They say the situation is so dire right now, that they have had little choice but to take this kind of aggressive action — and deal with the consequences later.
Jim Zarroli, NPR News.
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