The Securities Industry and Financial Markets Association (SIFMA) and
State Street Global Advisors (SSgA) both welcomed the U.S. Treasury’s plan to extend credit to faltering mortgage lenders Fannie Mae and Freddie Mac.
“The bold action taken by Secretary Paulson should have a very positive impact on the mortgage and broader markets,” says Tim Ryan, president and CEO of SIFMA. “This was an important step toward strengthening investor confidence.”
“In May, Fannie Mae and Freddie Mac were responsible for the issuance of more than 90% of mortgage backed securities,” Ryan said in a separate statement. “Clearly, they play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. These institutions play a key role in improving the health of the housing markets and the economy. Yesterday, with an eye toward market stability, Treasury unveiled a very sensible and responsible plan that protects both the taxpayers and the financial system. They should be applauded for their quick, innovative work at a critical time, and Congress should act with equal speed.”
Meanwhile, SSgA told Reuters that it had no plan to reduce its debt holdings in Fannie Mae and Freddie Mac, whose problems are rooted in capital adequacy and not liquidity, according to SSgA.
“It’s not just that they are too big to fail, it’s that they are too important to fail,” Ramon Moronilla, an SSgA portfolio manager, told Reuters. “For us, the bottom line is we are not selling, we are holding on to this debt.”
U.S. Treasury Secretary Henry Paulson announced a three-part plan on Sunday to shore up the troubled lenders.
“First,” Paulson says, “as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
“Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.
“Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.
“Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.”