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Published: Thursday, 7/17/2008

Freddie, Fannie safe, Fed chief says


WASHINGTON - Federal Reserve Chairman Ben Bernanke told Congress yesterday that troubled mortgage giants Fannie Mae and Freddie Mac are in "no danger of failing."

The Fed chief made his remarks to the House Financial Services Committee in his second day on Capitol Hill briefing lawmakers on the problems plaguing the economy.

The two companies hold or guarantee more than $5 trillion in mortgages - almost half of the nation's total- and are major sources of financing for the mortgage market.

On Wall Street, shares of both Fannie Mae and Freddie Mac jumped by about 30 percent each. Freddie had its biggest one-day percentage gain since 1988, and Fannie its best day since at least 1981.

The Bush Administration is asking Congress to temporarily increase lines of credit to Fannie and Freddie and to let the government buy their stock. The Fed has offered to let the companies draw emergency loans.

The pledges of aid have raised concerns on Capitol Hill and elsewhere about the government's role in intervening to ease such financial troubles and the risk posed to taxpayers.

Treasury Secretary Henry Paulson went to Capitol Hill yesterday evening for meetings with lawmakers from both parties on the administration's proposal for Fannie and Freddie.

Some Republicans have criticized the proposal as too open-ended and too risky for taxpayers. Republican leaders in the House have demanded hearings to further scrutinize the proposal.

The two mortgage giants are "adequately capitalized," Mr. Bernanke said.

However, "weakness of market confidence is having an effect" on the companies, making it difficult for them to raise capital.

The companies' shares have plunged as losses from their mortgage holdings threatened their financial survival.

The government's rescue plan was intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent the credit-market troubles that started last year from engulfing financial markets and further weakening the economy and housing markets.

"We will work our way through these financial storms," Mr. Bernanke said.

Mr. Paulson told Congress Tuesday that he hoped this lifeline won't need to be used. He said the pledge was aimed at boosting eroding investor confidence in the companies.

Mr. Bernanke said the "best solution" is to keep Fannie and Freddie "in their current form" rather than having the government take them over.

The Fannie and Freddie troubles came on the heels of the failure of IndyMac Bank. In March, a run on investment bank Bear Stearns & Co. Inc. pushed the company to the edge of bankruptcy and into a takeover by JPMorgan Chase & Co., backed financially by the Fed.

"How long before we hear a splash? Is there a bottom?" Rep. Emanuel Cleaver, a Missouri Democrat, asked of the financial troubles.

Spencer Bachus of Alabama, the panel's most senior Republican, said of the housing boom-to-bust situation: "Fortunes were made on the way up and pain will be felt on the way down."

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