14 Jul 2008

US government helps troubled mortgage firms

5:56 pm on 14 July 2008

The United States Treasury and Federal Reserve are offering massive aid to troubled mortgage finance giants Fannie Mae and Freddie Mac to bolster confidence in the institutions and head off a potential meltdown in financial markets.

The dollar jumped and stock futures rallied on the powerful message of support, but the announcement also drew criticism that the bailout could cost taxpayers dearly.

The two companies have been put under Federal Reserve oversight and given a bigger line of credit.

The Federal Reserve said on Sunday that the companies could access its discount window for emergency cash. The Treasury separately said that it would temporarily increase its line of credit to the two, as well as buy equity in them, if needed.

The move by the Federal Reserve echoed emergency action to help rescue investment bank Bear Stearns in March - for the first time since the Great Depression.

A Treasury official said all the proposals need approval by Congress, but expressed confidence that such approval could be secured this week.

The US dollar edged higher against the euro and yen on the news, which came before the scheduled sale of $US3 billion in three- and six-month notes by Freddie Mac on Monday.

The two companies either own or guarantee almost half of the outstanding mortgage debt in the US, about $US12 trillion. They are government-sponsored.

Fannie Mae and Freddie Mac buy mortgages and package them into guaranteed securities.

The BBC reports that their share prices fell nearly 50% last week amid fears that they might have trouble raising funds.

Bank failure

Bank regulators stepped in late on Friday to prop up mortgage lender IndyMac Bancorp Inc after withdrawals by depositors led to the third-largest banking failure in US history.

IndyMac is the fifth US bank to fail this year. It will reopen on Monday as IndyMac Federal Bank under Federal Deposit Insurance Corp supervision.