New direction for Fannie and Freddie

In early September the two government sponsored mortgage finance companies Fanninie Mae and Freddie Mac were put under the conservatorship, or legal control, of the U.S. government. The CEOs were dismissed and the Federal Housing Finance Agency Director James Lockhart III was installed as a temporary replacement for the board of directors.

"We did not take this action lightly. We counseled with Chairman Bernake...we also consulted with Secretary Paulson. They both concurred with me that conservatorship needed to be undertaken," said Lockhart during a House Financial Services Committee hearing.

"First signs, despite all the market turmoil are that the conservatorships are positive. I am pleased to say that the enterprises are funding costs and the spreads on the {Mortgage Backed Security} have declined."

Lockhart went on to say that since the conservatorship home rates for thirty year mortgages fell below six percent for the first time in 2008.

In order to pursue stability, Freddie Mac and Fannie Mae both had to go through major changes. The CEOs were replaced by former U.S. Bancorp Vice Chairman David Moffit and former Merrill Lynch president Herb Allison. Both companies have severely limited approval of low document and no document loans, and common stock and preferred dividends were eliminated, saving the companies $2 billion. In addition, Lockhart says both CEOs have been urged to be more creative in preventing home forclosures.

White House Briefing

Following the president's statement in the Rose Garden, White House spokeswoman Dana Perino and Director of the National Economic Council briefed the press on the government's increasing role in attempting to restore investor confidence to the struggling financial markets.

Hennessey outlined the steps that have been taken and those that the government would like to happen, "So we've got the conservatorship for Fannie and Freddie. Treasury and Fed worked over the last weekend, they were up in New York working with firms in the industry," he said. "We had the Fed taking steps just a couple days ago to prevent what they would call the disorderly liquidation of AIG, the insurance company. And then the Fed has been increasing significant amounts of liquidity into the financial system to keep things moving."

Hennessey reiterated statements made by President Bush about urging the Congress to pass legislation that would allow the federal government to buy illiquid assets from struggling financial institutions to further increase liquidity.

"The most obvious example of an illiquid asset is a mortgage asset, a mortgage-backed security that's probably lost value as the values of the homes that are underlying those mortgages have declined," he said. "And what's happening is, as those assets have lost value, people don't want to buy them, they become illiquid, it's hard for people to buy and sell them, and so they're stuck on the balance sheets of financial institutions."

Hennessey said that the White House would be in negotiation with congressional leaders over the weekend. Congress and the administration will need to hammer out the details of this authorizing legislation. Hennessey said that they would have to make "significant, substantive progress on the details" over the weekend.

"This is a very bold set of actions, we are calling on Congress to do something that is very big and that we believe needs to be done quickly," he said.

Capitol Hill reacts to government bailouts

The Hill is still reeling from Department of Treasury and Federal Reserve market interventions in the hard hit financial section.

"Enough is enough...We've got to bailout the taxpayer from bailout mania," said Rep. Jeb Hensarling (R-Texas). Hensarling and other House Republicans spoke out against government intervention in the market, including the recent government assistance of Bear Sterns, AIG and the takeover of government sponsored enterprises Freddie Mac and Fannie Mae. Hensarling, along with Marsha Blackburn (R-Tenn.), Michelle Bachman (R-Minn.), Tom Price (R-Ga.), Scott Garrett (R-NJ), and Tom Feeney (R-Fl.)

"The government is the lender of last resort," said Price. He said that risk is an inherent part of the free market system. Price and Feeney emphasized their view that the government is socializing risk as profits are kept private. The recent moves to facilitate sales and give loans to struggling financial giants by the Treasury Department are expected to add to the long term debt to be absorbed by the tax payer. "Again we believe that any short term gain by bailing out one another financial institution is not worth the long term pain of the moral hazard of taking us...to a lost decade of economic growth," said Hensarling.

Following a press conference to highlight recipients of certain government assistance programs like the Children's Health Insurance Program and the Low Income Energy Assistance Program, Senator Harry Reid (D-Nev.) and House Majority Leader Steny Hoyer (D- Md.) addressed the bailout of American International Group.

Reid, the Senate majority leader, decried "secret meetings" between Congress and the administration to lay out government assistance measures. "I think it's time that there's more than one branch of government. The American people deserve some transparency." Reid said that he believed that the Senate could do something to stabilize the economy by passing a bill to fund infrastructure before the current session comes to an end.

Hoyer said that there would be hearings in both the Financial Services and Oversight committees. He said that Financial Services Chairman Barney Frank (D-Mass.) would look into the future of regulations and that Oversight Chairman Henry Waxman (D-Calif.) would investigate what happened to lead up to these government bailouts. Hoyer said that committee would answer the questions "What went wrong? Why did we not regulate? Why did we not have the referee on the field?"

Hoyer: Only President Hoover was worse

House Majority Leader Steny Hoyer (D-Md.) waded into presidential politics criticizing the Bush administration's policies as Republican are casting themselves of agents of change. "It's difficult to understand how somebody who voted with the administration 90 percent of the time can project themselves as an agent of change," he said in reference to Republican presidential nominee Sen. John McCain. Hoyer criticized job growth saying , "It's been one of the slowest eight years in recent history. You'd have to go back to the Hoover administration to see worse..." He also compared the job growth numbers in the last eight months of the Clinton administration with those of the past year.

He said that a comprehensive energy bill in the House is a possibility in the upcoming week. The House Republicans have been clamoring for their "All of the Above" energy bill to be brought to the floor since the session adjourned in August. One of the principle complaints has been the moratorium of new oil and natural gas drilling offshore. Hoyer said that the Republicans have been passing moratorium language for the last eight years without striking it in conference.

Hoyer said he had spoken with the Secretary of the Treasury Henry Paulson about the government take over of the mortgage giants Freddie Mac and Fannie Mae. Hoyers said that he agreed that this action was a necessary one at this point and time.

Bernanke distinguishes the facts from the fear

The Senate Banking, Housing and Urban Affairs Committee held a full committee hearing on the Federal Reserve’s semiannual monetary policy report to Congress. Sen. Chris Dodd (D-Conn.) presided over the hearing and said that in considering the state of the U.S. economy, it is important to distinguish between fear and facts. Dodd explained that in the country’s markets today, in particular during the turmoil of recent days, far too many actions are being driven by fear, and are ignoring crucial facts. This neglect of the facts, Dodd said, has caused Americans to experience unprecedented hardship and uncertainties, and now more than ever, they need to know when things will start to turn around and when the country will get back on track.

Chairman of the Federal Reserve, Ben Bernanke, explained many of the significant challenges the U.S. economy and financial system have experienced thus far in 2008. Bernanke said that economic activity has advanced at a sluggish pace during the first half of the year, while inflation has remained elevated. Though the Federal Reserve and the Federal Open Market Committee (FOMC) have eased policies to counter weakness in economic growth and expanded some of the special liquidity programs and implemented additional facilities to support the functioning of financial markets and foster financial stability, the economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and other commodities.

Bernanke explained that investors have recently become particularly concerned about the financial condition of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Because of this, the Treasury announced a legislative proposal to bolster their capital, access to liquidity, and regulatory oversight. Healthy economic growth depends on well-functioning markets, thus, Bernanke said, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve.

Looking at the economy overall, Bernanke said that it has continued to expand, but at a subdued pace. The unemployment rate has risen to 5-1/2 percent, activity continues to weaken in the housing sector, and the labor market has “softened.” Bernanke explained that inflation has remained high and seems likely to move temporarily higher in the near term, while the price of oil currently stands at about five times its level toward the beginning of this decade. This surge in oil prices has been driven mostly by strong growth in underlying demand and tight supply conditions in global oil markets; the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil. Bernanke also said that the decline in the foreign exchange value of the dollar, along with financial speculation, have added to the increase in oil prices.

Bernanke finished by saying that the possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. On the other hand, upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher. Bernanke said that given this high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth.