U.S. Weighs Rescue of Mortgage Giants

Throughout the day yesterday, top-ranking government officials waged a concerted campaign to defuse worries about the future of the two mortgage companies while Wall Street analysts and other outsiders sent messages to one another suggesting that government intervention might be at hand.

Treasury Secretary Henry M. Paulson Jr. began the day by calling senior members of Congress, including key Democrats such as Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), House Financial Services Committee Chairman Barney Frank (D-Mass.) and Sen. Charles E. Schumer (D-N.Y.), to assure them that the companies were in good shape and that if action were needed to shore them up, the government would take it.

Paulson then put out a public statement rejecting the idea of a government takeover. "Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission," he said.

At the same time, he kept open the possibility that the government would act if needed. "We are maintaining a dialogue with regulators and with the companies," he added.

This public campaign was stepped up later in the day when Paulson and President Bush addressed the cameras at the Energy Department. The president said that Fannie Mae and Freddie Mac were "very important institutions" and that Paulson had assured him that he and Bernanke would be "working this issue very hard."

Key Democrats also expressed their faith in the companies. "There is sort of a panic going on today, and that's not what ought to be," Dodd said. "There's no reason to be talking about failure here . . . the institutions are in sound shape."

Four of the Senate's top Democrats, including Majority Leader Harry M. Reid (Nev.), put out an unusual joint statement that said in part: "Senate Democrats have confidence in Fannie Mae and Freddie Mac and we recognize they are critical to America's homeowners. We stand ready to work with the administration and to act quickly and decisively to assist these important agencies as necessary."

Although the idea of extending government lending to Fannie Mae and Freddie Mac has been discussed, Fed leaders don't think that would get to the heart of the problems facing the companies and view this situation as different than that of Wall Street investment bank Bear Stearns, which failed in March because it couldn't raise cash.

Fannie Mae and Freddie Mac, by contrast, continue to have access to debt markets. Indeed, the rate they must pay to borrow money dropped in the past day, as investors viewed the government as more likely than before to back the firms' debts if they were to fail.

"There have been no discussions with [Fannie Mae and Freddie Mac] about access to the discount window," said Michelle A. Smith, a spokeswoman for the Fed, referring to the central bank's program through which banks can receive emergency loans.

Both companies asserted that their financial condition was sound. "OFHEO has reiterated that Fannie Mae is adequately capitalized, the highest capital designation given by our regulator," said Chuck Greener, Fannie Mae's senior vice president. "More broadly, Treasury Secretary Henry Paulson and leaders in Congress have also issued statements of support, for which we are appreciative."

Freddie Mac made a similar assertion. "We believe current speculation in the media around the issue of conservatorship does not accurately reflect the facts," a company statement said. "Freddie Mac is adequately capitalized, highly liquid and an essential part of the nation's housing system."

For Fannie Mae or Freddie Mac to be taken over by the government, their federal regulator would have to declare that they have too little capital as a cushion against losses. This week, senior government officials said that the opposite was the case.

But even if that were not so, conservatorship probably would not solve the companies' problems, experts agreed. Under this arrangement, the regulator or its designee would take over management of the company, but that wouldn't eliminate the economic challenges.

On the presidential campaign trail, Sen. John McCain (Ariz.), the presumptive Republican nominee, said it was "very likely" that government intervention would be required to inject new capital into the two ailing institutions.

Sen. Barack Obama (Ill.), the presumptive Democratic nominee, was more circumspect, saying that Fannie Mae and Freddie Mac played an "essential role" in housing.

Staff writers David Cho, David S. Hilzenrath, Lori Montgomery and Michael Shear contributed to this report.