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This Is Moving Very Rapidly Indeed

Iain Dey and Dominic Rushe:

US Treasury rescue for Fannie Mae and Freddie Mac - Times Online: US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion (£7.5 billion) of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms. The two companies lost almost half their market value last week as rumours of a government bail-out swept the stock markets, hammering share prices around the world. Together, the two stockholder-owned, government-sponsored companies own or guarantee almost half of America’s $12 trillion home-loan market and are vital to the functioning of the housing market. The capital-injection plan is said to be high on a list of options being considered by regulators as a means of restoring confidence in the lenders. The move would protect the American housing market, but punish shareholders in both companies.

The potential rescue comes as investors are braced for more bad news from the financial sector. Citigroup is expected to reveal further writedowns of at least $8 billion with its second-quarter results, and Merrill Lynch is forecast to reveal writedowns of some $4 billion. Both banks are expected to post sizeable losses for the second quarter, and reveal plans to sell off billions of pounds worth of assets. A number of US regulators and politicians have been attempting to restore confidence in the two mortgage agencies. Paulson and President George Bush stepped in to give vocal support to the two firms on Friday. “Freddie Mac and Fannie Mae are very important institutions,” said Bush, adding that he had spoken with Paulson who had “assured me that he and Ben Bernanke [the Federal Reserve chairman] will be working this issue very hard”.

Paulson killed off speculation that the government would renationalise the two agencies, a move that would have pitched the US public accounts into a new state of crisis. However, Paulson pledged to support the two companies “in their current form”. He is said to have been concerned about the prospect of a rescue plan benefiting shareholders. The capital injection would also see both lenders granted permission to use the Federal Reserve’s discount window - a short-term emergency funding source...