Fannie Mae and Freddie Mac: Notice the word UNLIMITED SIZE in the last sentence.
By Daniel at 7 September, 2008, 10:40 pm
Bold move trades promises for public cash
By Krishna Guha in Washington
Published: September 7 2008 21:01 | Last updated: September 7 2008 21:01
Sunday’s dramatic intervention by the US government in Fannie Mae and Freddie Mac has two key objectives: to bring down mortgage rates and ease financial market stress by making it clear that debt securities issued by these firms are safe since the US government will not allow either of them to fail.
To achieve this the government unleashed a triple salvo of support. First, it will provide capital injections of up to $100bn for each company to ensure they retain positive net worth and can continue to honour their debts, on what a US official called a “pay as you go as needed” basis.
Second, it will start buying mortgage bonds issued by the two government-sponsored enterprises (GSEs), starting with a $5bn purchase, while also allowing the companies to raise their retained holdings by more than $100bn
Third, it will provide a backstop liquidity support facility of unlimited size, modelled on the new credit facility created by the Federal Reserve for investment banks and managed by the New York Fed. Meanwhile the companies will be put under the control of their regulator.
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