Fed to support Fannie and Freddie

The US Federal Reserve has stepped in to support the struggling government-sponsored mortgage holders Fannie Mae and Freddie Mac.

The Fed announced yesterday it would lend to the two government-sponsored entities (GSEs) through its New York branch at the primary credit rate, in exchange for US government and agency securities as collateral. And Henry Paulson, the US Treasury secretary, said the US government would step in to rescue the GSEs and their shareholders.

Fannie Mae and Freddie Mac must continue to operate "in their current form as shareholder-owned companies", Paulson said – effectively ruling out any form of nationalisation.

The Treasury would also increase the GSEs’ $2.25 billion credit lines and fund the GSEs further by buying equity, if needed. In the longer term, the Fed will be allowed a consultative role in setting capital requirements and standards for the GSEs.

Shares in the GSEs plunged last week, with Fannie Mae down 45% over the course of the week, closing at $10.25, and Freddie Mac down 47% to $7.75.

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Call of duty