Acting to avert bankruptcy for the nation's two biggest home loan lenders, Congress approved an emergency "rescue package" over the weekend of July 12-13 that gives the Treasury Department the ability to inject billions in investments and loans to Fannie Mae and Freddie Mac.
Under the three-pronged plan, Treasury Secretary Henry Paulson said in a statement that the plan includes a temporary increase in the line of credit the two government sponsored enterprises (GSEs) have with Treasury. Also, to ensure the GSEs have access to sufficient capital, he said, "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, he said, "would carry terms and conditions necessary to protect the taxpayer."
Third, to protect the financial system from systemic risk going forward, Paulson said, "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." The Federal Reserve is also allowing Fannie and Freddie to access its discount loan window.
