Capital Markets

Fed to Buy Fannie, Freddie Short-Term Debt

The Federal Reserve Board will also provide loans to banks so they can rebuild their asset-backed commercial paper portfolios.
Marie LeoneSeptember 19, 2008

The U.S. government made yet another financial rescue effort Friday when the Federal Reserve Board announced it would buy short-term debt from Fannie Mae and Freddie Mac, the two mammoth mortgage lenders the government bailed out in July.

In addition, the Fed said it would extend nonrecourse loans — at the primary credit rate — to U.S. depository institutions and bank holding companies to finance their purchases of “high-quality asset-backed commercial paper from money market mutual funds.” The discount rate charged for primary credit is set above the usual level of short-term market interest rates.

The two initiatives, orchestrated to enhance liquidity in financial markets, come on the heels of two other announcements Friday: that the Securities and Exchange Commission was temporarily banning short-selling of nearly 800 financial institutions’ stock, and that the U.S. Treasury would guarantee money market funds if the investments slipped below $1 per share.

According to the Federal Reserve, the loan program for ABCP “should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity.”

The bailout of Fannie and Freddie was threefold. Working with the Federal Reserve, the SEC, and the Office of Housing Enterprise Oversight — which regulates Fannie and Freddie — the Treasury Department asked Congress to approve a “liquidity backstop” that temporarily increases the line of credit the mortgage companies currently have with Treasury. Further, to ensure that the lenders have sufficient capital, the plan included temporary authority for the Treasury Department to purchase equity in either of the companies. Finally, the plan called for the Federal Reserve to play a “consultative” role for setting capital requirements and other “prudent standards.”

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