Fannie and Freddie rescue calms markets

A US government plan to shore up mortgage finance firms Fannie Mae and Freddie Mac helped calm markets yesterday but did little to allay fears about the health of the US financial system.

The US Treasury and Federal Reserve plan, announced on Sunday evening, called for sweeping measures to lend money and buy equity if necessary in Freddie Mac and Fannie Mae, government-sponsored (GSE) enterprises owned by shareholders.

The plan was hatched in an attempt to calm investors after stocks of both plummeted more than 40 per cent last week on fears the companies, pillars of the housing market, were under-capitalised and the credit crisis toppled a fifth US bank.

Fannie and Freddie own or guarantee $5 trillion (£2.5 trillion) of debt, close to half the value of all US mortgages. Foreign central banks, mostly in Asia, hold $979 billion of the bonds and mortgage-backed bonds sold by the agencies.

"(Their) continued strength is important to maintaining confidence and stability in our financial system and our financial markets," US Treasury Secretary Henry Paulson said in a statement that he read on the steps of the Treasury building.

"Therefore, we must take steps to address the current situation as we move to a stronger regulatory structure," he said.

Bill Gross, who manages the $130 billion Pimco Total Return Fund, said while this does not explicitly guarantee the bonds of Fannie Mae and Freddie Mac, "it tells the market that the government will not allow them to fail."

Unveiling the emergency measures to calm markets roiled by the country's prolonged housing crisis, the Fed said Fannie and Freddie could have access to its emergency cash, echoing a move to support investment banks after the Fed organised a takeover of ailing investment bank Bear Stearns in March.