Gridlock News

It doesn't take a digital frame full of pictures of the economy to read this as a very dangerous premonition of where the economy is and where it is going.

Treasury Secretary Henry Paulson indicated Sunday evening that the Federal Government will be taking action to attempt to save Fannie Mae and Freddie Mac from failing after their stock prices sank more than 50% on Wall Street last week.

Based on the Treasury response it would appear that the Federal Government, including Treasury, the SEC, and the Federal Reserve all feel that these institutions are in serious jeopardy.  Unlike the Bear Stearns bail out last winter, this government bail out is likely to cost the government a very large amount of money, possibly making the Iraq War look cheap.

Below is a complete text of the statement by Secretary Henry M. Paulson, Jr. 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. Their support for the housing market is particularly important as we work through the current housing correction. GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately. First, 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. Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed. Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.