A US government plan to shore up mortgage finance firms Fannie Mae and Freddie Mac helped calm US markets this morning but did little to allay fears about the health of the American financial system.
The US Treasury and Federal Reserve plan, announced yesterday, called for sweeping measures to lend money and buy equity if necessary in Freddie Mac and Fannie Mae, government-sponsored (GSE) enterprises owned by shareholders.
The plan was issued in an attempt to calm investors after stocks of both plummeted more than 40 percent last week on fears the companies, pillars of the housing market, were under capitalised and the credit crisis toppled a fifth US bank.
Fannie and Freddie own or guarantee $5 trillion of debt, close to half the value of all US mortgages. Foreign central banks, mostly in Asia, hold $979 billion of the bonds and mortgage-backed bonds sold by the agencies.
"(Their) continued strength is important to maintaining confidence and stability in our financial system and our financial markets," US Treasury Secretary Henry Paulson said in a statement that he read on the steps of the Treasury building.
"Therefore, we must take steps to address the current situation as we move to a stronger regulatory structure," he said.
The dollar jumped and stock futures rallied on the powerful message of support from Washington, which also drew criticism for being a potential bailout that could cost US taxpayers dearly.
Asian stock markets were mixed, with shares in China and Japan higher but lower elsewhere as investors grappled with the implications for the financial sector. Japanese government bond futures fell, tracking a drop in Treasuries.
Unveiling the emergency measures to calm markets roiled by the country's prolonged housing crisis, the Fed said Fannie and Freddie could have access to its emergency cash, echoing a move to support investment banks after the Fed organised a takeover of ailing investment bank Bear Stearns in March.
The Treasury separately said it would temporarily raise its line of credit to the two mortgage financiers, as well as purchase equity in them, a step never taken before, if needed.
Both companies said they were adequately capitalised, but welcomed the measures and said they would help confidence.
Officials are desperate to calm nerves ahead of a crucial debt issue by Freddie Mac today and after US bank regulators on Friday seized mortgage lender IndyMac Bancorp in the third-largest bank failure in US history.
A senior Treasury official said all the actions it proposed need congressional approval, but expressed confidence that could be secured this week.
Shares in the two mortgage giants have been hammered by concerns that they might run out of capital amid mounting home-loan losses.
Housing woes have forced the Fed to slash benchmark interest rates since September and open its discount window to investment banks for the first time since the Great Depression some 80 years ago.
Fannie and Freddie buy mortgages from lenders and package them into guaranteed securities, providing more funds to keep mortgage markets lubricated. They also borrow regularly on capital markets to fund their operations.
Both companies play a vital role in US housing markets, which already are experiencing their deepest downturn since the Great Depression, and Treasury and the Fed are on the spot to make sure they do not put a sorely stressed financial system in worse shape than it is already in.
Many fear that were they to fail it would unhinge already battered world financial markets and inflict a deep recession in the United States that would chill growth everywhere.
Reuters