WASHINGTON Alarmed by the sharply eroding confidence in the nation's two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.
In a separate announcement, the Federal Reserve said that it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision "to promote the availability of home mortgage credit during a period of stress in financial markets."
An official said the Fed's decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury but that it was temporary and would probably end once Congress approved Treasury's plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.
It was the second time in four months that the housing crisis had prompted the government to step in and rescue a major financial institution. Last March, the Treasury Department engineered the sale of Bear Stearns to prevent it from going into bankruptcy and causing a shock to the financial system.
The administration's plan was disclosed on Sunday evening to calm jittery markets overseas and on Wall Street in advance of a debt sale by Freddie Mac this morning. Officials said that after talking to senior lawmakers through the weekend, they expected that Congress would attach the proposals to a housing bill that could be completed and sent to the White House for approval as early as this week.
"The president has asked me to work with Congress to act on this plan immediately," Treasury Secretary Henry Paulson said Sunday on the steps of the Treasury building. "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction."
While senior Democratic and Republican officials in successive administrations have for many years repeatedly denied that the trillions of dollars of debt they issued is guaranteed, the package, if adopted, would bring the Treasury closer than ever to exposing taxpayers to potentially huge new liabilities.
Officials seemed to suggest, however, that they had little choice. Over the weekend, Treasury officials sought assurances from Wall Street firms that a $3 billion auction by Freddie Mac of short-term debt would go off without a hitch. While $3 billion is a relatively small sum for an institution of Freddie's size, officials said they did not want to risk even a small misstep that could set off a new round of problems.
One senior executive of an investment bank said Sunday evening that the government could not take the chance that the auction would not go well. "The system is under attack," he said.
The government officials said that the more drastic alternative that has been considered placing one or both companies under the control of a government-appointed conservator would be done only as a last-ditch measure if the intermediate steps failed to restore confidence.
They said they were prompted to act because, despite repeated assurances by top officials that the companies had adequate cash to weather the current financial storm, Fannie and Freddie suffered a withering blow of confidence last week when their stocks plummeted on the New York Stock Exchange. As a result, Freddie Mac faced an uncertain debt offering today.
The failure of just one of the companies could be catastrophic for economies around the world. The companies, known as government-sponsored enterprises, or GSEs, touch nearly half of the nation's mortgages by either owning or guaranteeing them, and the debt securities they issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds, big companies and other large institutional investors.
"GSE debt is held by financial institutions around the world," Paulson said in his statement. "Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure."
The proposal would give the Treasury secretary authority to determine when to invest in the companies or extend loans to them. Those purchases would be made with the agreement of the companies.
Officials said the proposed investment and lending elements of the plan were to last two years.
While the Treasury did not specify the size of the packages, officials briefed on the plan said they were told by administration officials that, to be meaningful, Congress should consider extending the line of credit to the two institutions to $300 billion.
Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion. Today the two companies also hold or guarantee loans valued at more than $5 trillion, roughly half of the nation's mortgages.
Lawmakers said that as part of the plan, the administration called on Congress to raise the national debt limit. And it asked Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold. Giving the Fed a consulting role in the companies' oversight is seen as yet another way to reassure nervous markets.
Initial reaction to the plan by some congressional Democrats was positive.
An early endorsement came from Sen. Charles Schumer, D-N.Y., who is also a senior member of the banking committee.
"The Treasury's plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers," Schumer said. "While Fannie and Freddie still have solid fundamentals, it will be reassuring to investors, bondholders and mortgage-holders that the federal government will be behind these agencies should it be needed."
Rep. Barney Frank, D-Mass., and one of the authors of the housing legislation, said he supported the Treasury proposal. He said he expected the plan would be included in the housing bill, which he said would be approved, sent back to the Senate and likely land on the president's desk by the end of the week.
"The general thrust of what they're doing is right," said Frank, the chairman of the House Financial Services Committee.
Sen. Barack Obama of Illinois, the presumptive Democratic presidential nominee, told reporters in San Diego on Sunday that any government action to rescue the two mortgage companies should be done from the perspective of homeowners, "not just shareholders and investors and CEOs of companies."
His presumed Republican opponent, Sen. John McCain of Arizona, said last week that he expected the government would do everything in its power to prevent the failure of either company.
The administration's announcement was made after senior officials from the Treasury and the Federal Reserve spent Saturday and Sunday closely monitoring preparations by Freddie Mac to raise money to help meet its short-term financing needs. Officials said they were watching to see if the steep declines last week of Freddie and Fannie stock would spill into the debt market and undermine the confidence of lenders.
A senior official said that the administration had been receiving mixed signals from Wall Street about today's auction. But other officials denied that the prospect of a weak debt offering had motivated the Treasury to rush out its rescue plan.
"There is nothing that motivated us to act tonight that changed from Friday night," said a Treasury official. "There has been no further deterioration in the markets."
Daniel H. Mudd, the president and chief executive of Fannie Mae, said the company "appreciates today's announcements and the expressions of support."
"We continue to hold more than adequate capital reserves and maintain access to liquidity from the capital markets," Mudd said. "Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market."
Richard F. Syron, chief executive of Freddie Mac, said, "This affirmation of the important role of the GSEs, and that we should continue to operate as shareholder-owned companies, should go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America's homebuyers and renters."
On the prospect that the government could buy shares in the companies, Sharon J. McHale, a spokeswoman for Freddie Mac, said, "It's important to note that our understanding with Treasury is that any agreement to purchase equity can only occur with the mutual agreement of both parties."
• In somewhat related news, the Securities and Exchange Commission said Sunday it is immediately opening a probe to prevent the spread of false information used to manipulate securities prices.
SEC Chairman Christopher Cox said the investigation is aimed at "ensuring that investors continue to get reliable, accurate information about public companies in the marketplace."
The probe comes amid a new bout of turmoil that has gripped investors, including questions have been swirling about the financial health of mortgage giants Fannie Mae and Freddie Mac as well as Lehman Brothers Holdings Inc.
Earlier this year, a run on Bear Stearns pushed the investment bank to the brink of bankruptcy and into a takeover by JPMorgan Chase. Bear officials blamed market rumors for the run.
The investigation will be conducted by the SEC's Office of Compliance Inspections and Examinations as well as the Financial Industry Regulatory Authority and New York Stock Exchange Regulation Inc.
Cox said the probe will provide an opportunity to make sure brokers and investment advisers have "appropriate training for their employees and sturdy controls in place to prevent intentionally false information from harming investors."
By law, brokers and investment advisers must have procedures in place to prevent market manipulation and other violations.
Investigators will focus on such procedures, or controls, and whether "they are reasonably designed to prevent the intentional creation or spreading of false information intended to affect securities prices or other potentially manipulative conduct," the agency said.The probe is separate from SEC's investigations, already under way, into alleged intentional manipulation of securities prices through "rumor-mongering and abusive short selling," the agency said in a statement.
Contributing: Jeannine Aversa, Associated Press