A government plan to extend a line of credit to Fannie Mae and Freddie Mac and buy stock in the companies if needed was not prompted by any sudden deterioration in Fannie’s or Freddie’s bottom lines, and neither company has immediate plans to borrow from the government, Treasury Secretary Henry Paulson told Senate lawmakers today. Speaking before the Senate Banking Committee, Paulson asked lawmakers to give the Treasury Department the authority it needs to carry out a three-part plan, which he said was "aimed at supporting the stability of financial markets, not just these two enterprises."

Debt and other securities issued by the government-sponsored entities, or GSEs, "are held by financial institutions around the world," Paulson said. "Continued confidence in the GSEs is important to maintaining financial system and market stability." The GSEs are purchasing or guaranteeing 70 percent of new mortgages, and "represent the only functioning secondary mortgage market. The GSEs are central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction," Paulson said.

While some investors fear a government takeover of Fannie and Freddie, Paulson said the Bush administration "support(s) the current shareholder-owned structure of these enterprises. Our plan addresses current market challenges by ensuring, on a temporary basis, access to both liquidity and capital, while also ensuring that the GSEs can fulfill their mission."

In addition to granting the Treasury Department a temporary increase in the amount it’s authorized to lend Fannie and Freddie and the authority to purchase equity in either company, Paulson said the third part of the plan is the creation of an independent regulator to oversee the companies. The House and Senate have both passed separate bills that would create an independent regulator, but differences in the bills must be reconciled (see story). Paulson said he hoped Congress would incorporate the additional authority for the Treasury to loan money to Fannie and Freddie or buy equity in them as a "capital backstop" into the bills.


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