Markets Calm After Fed Plan for Fannie and Freddie

The proposals from the Treasury Department were formulated with the hope of insuring stability in the mortgage markets and in the stock market. The plan would give the government the authority to buy Fannie and Freddie stock if other investors are unwilling to do so. It would also reportedly extend their line of credit from a tiny $2.25 billion to as possibly as large as $300 billion.

The plan also seeks to grant greater oversight of the two companies to the Federal Reserve. Lax and loose regulation of the two quasi-government entities is partly to blame for their highly leveraged position. Their $5 trillion in loans are backed by less than $100 billion in cash.

The actions require Congressional approval so, meanwhile, the Federal Reserve announced Sunday night in coordination with the Treasury Department it will open its discount lending window to Fannie and Freddie as it did to struggling investment banks in the aftermath of the Bear Stearns collapse.

Fannie and Freddie can now get loans for up to 90 days if needed. Allowing Freddie and Fannie access to the Fed's money is a temporary, stop-gap measure until the legislation the Treasury asked for is passed.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, today called the Bush administration's actions Sunday "probably the right steps" and said he will summon Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke to a committee hearing Tuesday to answer questions.

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