Henry Paulson has urged Congress to move quickly to pass a $700bn (£382bn) package to tackle the worst financial crisis for decades.

The US Treasury Secretary plans to set up a fund to buy back much of the bad debt held by banks and financial institutions around the world.

Speaking on US television, Mr Paulson said the financial market turmoil was a “humbling experience”.

He also urged other countries to adopt similar schemes to shore up confidence.

“I wouldn’t bet against the American people and I wouldn’t bet against the long-term fundamentals of this country.

“But this is a humbling experience to see such fragility in capital markets and to ask how did we ever get here,” Mr Paulson told NBC’s Meet the Press.

Congressional and Treasury officials have been meeting over the weekend to try to get the package signed into law within a matter of days.

International rescue

Under the draft Treasury plans, financial institutions with “significant operations in the US” are eligible to sell or auction their bad debts to Treasury fund.

“Banks eligible to sell to this Treasury-owned bank would be banks with significant operations in the US – so, for example, Royal Bank of Scotland and Barclays would be able to dump their toxic mortgage-related investments on the Treasury”

The fund would aim to sell off these mortgage-related debts in the future.

That would mean a number of British banks could sell their soured assets to the Treasury-owned bank – via an auction – according to the BBC’s business editor, Robert Peston.

On Saturday, US President George Bush defended the plan, saying the cost to taxpayers of shoring up markets was better than the alternative of job losses and diminished pensions.

“I’m convinced that this bold approach will cost American families far less than the alternative,” he said.

“Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions.”

Regulations overhaul

The Treasury has revealed little detail of its ambitious package, other than the estimated cost of buying these bad debts and who is eligible for the scheme.

… the world is changing very fast, but the governance of the global financial system has not caught up with it and that’s what’s got to change

Gordon Brown

Mr Paulson has asked for congressional approval to raise the amount the government can borrow to $11.3 trillion (from $10.6 trillion) to cover that cost.

Analysts say the devil was in the detail, for example, how much the Treasury will pay for the banks’ toxic assets.

Some members of Congress are uneasy at the thought of the taxpayer taking on hundreds of billions of dollars of currently worthless debt, the BBC’s North America editor Justin Webb says.

But the leader of the Democrats in the House of Representatives, Steney Hoyer, has said he expects quick action.

After a week of turmoil, stock markets around the world rallied on news of the rescue plan, with the UK’s FTSE 100 closing on Friday with its biggest one-day gain.

The US Treasury Secretary also said that the government would be stepping up action to increase the availability of capital for new home loans.

Once this difficult period was over, Mr Paulson said, the government’s next task would be to overhaul bank regulations.

‘New economy’

The UK prime minister said on Sunday that one of the lessons from the global financial crisis is the need for international regulation to be brought up to date.

Gordon Brown told the BBC: “We’re in a new economy, a global financial economy, the world is changing very fast, but the governance of the global financial system has not caught up with it and that’s what’s got to change.”

Mounting fears that the credit crisis is beginning to spread out through the financial system have rocked shares and companies recently.

Investment giant Lehman Brothers collapsed last Monday, rival Merrill Lynch was bought out by Bank of America, and the US government has bailed out insurer AIG with an $85bn rescue package and state-backed mortgage lenders Fannie Mae and Freddie Mac.

News reported by The BBC

The US budget deficit is expected to reach a record $438bn in 2009, according to estimates from the Congressional Budget Office (CBO).

It also warns the deficit could go higher as the figure does not take into account possible government costs for taking over Fannie Mae and Freddie Mac.

The CBO added the US government will run a deficit of $407bn this year.

During the next fiscal year – starting on 1 October – a “turbulent” economy would cut revenues, the CBO warned.

‘Increase in spending’

The CBO estimate for 2009 does not include the possible costs of rescuing the two stricken giant mortgage firms, which was announced on Sunday.

Its assessment of $438bn would breach the 2004 record of $413bn and far outstrip the $161bn budget shortfall last year.

“The significant expansion in the deficit is the result of a substantial increase in spending and a halt in revenue growth,” the CBO report said.

In 2008, the CBO estimates, federal spending will be 8.3% higher than it was in 2007; at the same time, total revenues will be less than they were in 2007.

‘Past recessions’

At a news conference, CBO director Peter Orszag said it was too soon to say whether the US officially is in a recession.

But he said that the recent rise in unemployment and economic weakness “are consistent with the pattern seen in past recessions, the past few recessions to be precise”.

He also said CBO’s budget estimates did not take into account possible costs related to the US government for taking over Fannie and Freddie.

But he said the cost of the operation should be directly incorporated into the federal budget, which could further swell deficits.

News reported by The BBC

Global shares have rallied after the US government said it was taking over troubled mortgage lenders Freddie Mac and Fannie Mae.

Investors hoped the largest bail-out in US history would prop up the country’s housing market and ultimately help to end the credit crunch, analysts said.

On Wall Street, major shares added 2.58% in trading while key European and Asian indexes were up by at least 2%.

President Bush said the firms had posed “an unacceptable risk” to the economy.

Solvency bid

In a dramatic move, US Treasury Secretary Henry Paulson announced the rescue plan on Sunday, before markets opened.

FREDDIE MAC & FANNIE MAE
The two firms:
Buy mortgages from approved lenders and then sell them on to investors – rather than lending directly to borrowers
Guarantee or own about half of the $12 trillion US mortgage market
Are relied on by almost all US mortgage lenders
Are looked to for funds to meet consumer demand for mortgages
Link mortgage lenders with investors – keeping the supply of money widely available and at a lower cost
Have no direct UK equivalent

Q&A: Freddie Mac and Fannie Mae
The importance of Freddie and Fannie

Between them Freddie Mac and Fannie Mae finance or guarantee nearly half of the outstanding mortgages in the US, and have lost billions of dollars during the US housing crash.

Much of their bond debt was ultimately held by Asian banks, who had recently begun withdrawing their investment.

The most recent figures show that about 9% of US mortgage holders were behind on their payments or faced repossession.

The rescue could cost the Federal government $200bn (£100bn) as it invests fresh capital into the stricken mortgage giants to keep them solvent.

But a collapse of the two lenders would have frozen US mortgage lending for years, and would likely have lead to even steeper declines in house prices.

According to one widely-reported index, US house prices are falling at an annual rate of more than 15% in major metropolitan areas, putting many people in negative equity.

Shares rally

The rescue plan reassured investors worldwide who feared that a collapse of the government-sponsored enterprises could have a ripple effect on financial markets, with further losses by major banks leading to yet further cutbacks in credit and lending.

FROM THE TODAY PROGRAMME

More from Today programme

On Wall Street, the Dow Jones added 2.58% in afternoon trading – a welcome rally after it lost 4% last week.

Meanwhile in London, FTSE 100 index was 3.92% ahead at close after a technical glitch had brought trading to a halt for much of a day.

It had lost 7% last week – its worst showing in more than six years.

UK banking stocks had been buoyed by the news from the US, some adding as much as 15%. House builders also gained on hopes that the move could signal a turnaround in the sector.

Germany’s Dax-30 index was 2.22% ahead at close and France’s Cac-40 added 3.42%.

Meanwhile Japan’s Nikkei index closed up 3.4%, while the Hang Seng index added 4%.

US Treasury Secretary Henry Paulson on the reasons behind the government’s decision.
And key indexes in Singapore, Australia and Taiwan were also higher.

On Wall Street, where the Dow Jones index shed 4% across the previous five sessions, there have been positive signs.

The effective government takeover will lead to major changes in how the two mortgage giants are run.

As part of the changes, the management of the two companies will be replaced while the firms will be given access to extra funding to support their business going forward.

HAVE YOUR SAY I have lost both faith and trust in banks
Keith Ridgers, Cobham
Send us your commentsMr Paulson said the government was intervening in the wider interests of the financial system and of taxpayers since the financial position of the two firms was fast deteriorating.

The move is intended to keep the two companies afloat, amid fears that either could go bankrupt as borrowers default on their home loans.

Together, Freddie Mac and Fannie Mae own or guarantee about $5.3 trillion (£3 trillion) of mortgages.

But they have made a combined loss of about $14bn in the past year and officials were worried that they would no longer be able to continue functioning if such losses continued.

Banks around the world are highly exposed to the two companies and therefore, given the febrile state of markets across the world, it had become dangerous for doubts to persist about whether they were viable and would be able to keep up the payments on their massive liabilities, says the BBC’s business editor Robert Peston.

A rescue plan passed by Congress in July gave the US government the authority to offer unlimited liquidity to the two companies, and to buy their shares, in order to keep them afloat.

News reported by The BBC

US President George Bush says mortgage giants Freddie Mac and Fannie Mae have been taken over because they posed “an unacceptable risk” to the economy.

The two companies account for nearly half of the outstanding mortgages in the US, and have lost billions of dollars during the US housing crash.

The most recent figures show about 9% of US homeowners were behind on their payments or faced repossession.

The federal takeover is one of the largest bail-outs in US history.

It was announced on Sunday by Treasury Secretary Henry Paulson.

“Putting these companies on sound financial footing, and reforming their business practices, is critical to the health of our financial system,” President Bush said.

“The actions taken today are temporary, and will support housing finance in the near term.”

‘Comprehensive action’

As part of the changes, the management of the two companies will be replaced while the firms will be given access to extra funding to support their business going forward.

Treasury Secretary Henry Paulson said the government was intervening in the wider interests of the financial system and of taxpayers since the financial position of the two firms was fast deteriorating.

“A failure of either of them would create great turmoil in financial markets here and around the globe” Henry Paulson on Freddie Mac and Fannie Mae

He added that the two firms’ debt levels posed a “systemic risk” to financial stability and that, without action, the situation would get worse.

“We examined all options available and determined this comprehensive and complementary set of actions best met the objectives of market stability, mortgage availability and taxpayer protection,” he said.

“Fannie Mae and Freddie Mac are so large and interwoven in our financial system that a failure of either of them would create great turmoil in financial markets here and around the globe.”

US treasury statement on the future of Freddie Mac and Fannie Mae

The move is intended to keep the two companies afloat, amid fears that either could go bankrupt as borrowers default on their home loans.

The two firms will be administered by the Federal Housing Finance Agency until their long-term future is decided.

The Congressional Budget Office has said such a move could cost up to $25bn but Mr Paulson said there was no reason why taxpayers should have to directly foot the bill.

Funding guarantee

Together, Freddie Mac and Fannie Mae own or guarantee about $5.3 trillion (£3 trillion) of mortgages.

But they have made a combined loss of about $14bn in the past year and officials were worried that they would no longer be able to continue functioning if such losses continued.

“For the US Treasury, the bailout could turn out to be one of the most expensive financial rescues in history” Robert Peston’s thoughts

The Treasury’s funding guarantees to the two firms – which will include it buying up high-risk mortgage backed securities used to fund the mortgage market – will last until the end of 2009.

During that period, neither Fannie Mae nor Freddie Mac will be able to make any payments to their shareholders.

But Mr Paulson warned that the move was only a short-term “stabilisation” exercise.

He said it would be up to Congress to agree proposals to reform the two firms and address their “pervasive weaknesses”.

Federal Reserve chairman Ben Bernanke said he “strongly endorsed” the proposals to ensure the two firms remained financially sound.

“These necessary steps will help to strengthen the US housing market and promote stability in our financial markets,” he said.

Banks around the world are highly exposed to the two companies and therefore, given the febrile state of markets across the world, it had become dangerous for doubts to persist about whether they were viable and would be able to keep up the payments on their massive liabilities, says the BBC’s business editor Robert Peston.

A rescue plan passed by Congress in July gave the US government the authority to offer unlimited liquidity to the two companies, and to buy their shares, in order to keep them afloat.

News reported by The BBC

US mortgage giants Freddie Mac and Fannie Mae face being put under government control in an attempt to rescue the firms, media reports say.

Top bosses would be removed under the US Treasury plans – which could see the US’s largest ever financial bail-out.

The shareholder-owned companies, which are mandated to provide funding to the US housing market, hold or guarantee half the country’s mortgage debt.

In July, Congress approved a plan aimed at offering them more liquidity.

This followed huge losses by the two firms as result of a big increase in defaults and repossessions in the US housing market.

‘Management told’

The Washington Post, citing senior administration sources, said the firms would be put under a legal status known as “conservatorship” which would greatly reduce the value of the two companies’ common stock.

Other securities – including company debt and preferred shares – would be guaranteed by the government, the paper added.

The New York Times reported that senior executives at Freddie Mac and Fannie Mae were informed about the plan on Friday.

The Wall Street Journal said it would include changes in the top management.

There would also be quarterly infusions of cash to keep both firms afloat, the papers say. The total cost to taxpayers is not known but could amount to billions of dollars, they add.

The Associated Press news agency said official confirmation of the plan could come this weekend.

Fragile

On Friday America’s Mortgage Bankers Association reported that at the end of June, about four million homeowners with a mortgage – representing a record 9% – either were behind in their payments or faced repossession.

In the past year, the financial crisis have taken a heavy toll on both Fannie Mae and Freddie Mac.

The country’s two largest buyers and backers of mortgages lost a combined $3.1bn between April and June.

Both companies say they have the resources to weather the losses, but their shares have fallen sharply on fears that they could go bankrupt as borrowers default.

The rescue plan passed by Congress in July gave the US government the authority to buy shares and offer liquidity to companies to keep them afloat.

Many analysts believe their collapse would be a major shock to the already fragile global financial system.

Together, the two firms own or guarantee about $5.3 trillion worth of home loans – about half the outstanding mortgages in the US.

That is about 25 times as big as the obligations of Northern Rock – which was nationalised by the UK government earlier this year, and twice the size of the UK economy.

News reported by The BBC

US mortgage giant Fannie Mae has announced a shake-up of top executives, in an attempt to restore confidence after a series of losses.

Three executives have left, but the board said it remained committed to its chief executive Daniel Mudd.

Fannie Mae and Freddie Mac are a key part of the US market, guaranteeing half the mortgages offered.

Stephen Swad, chief financial officer since last year, will be replaced by controller David Hisey.

“When you change risk management people, it has to be viewed as recognising problems” David Dreman, shareholder

Peter Niculescu, head of capital markets, will replace Robert Levin as chief business officer. Enrico Dallavecchia, the company’s chief risk officer, will also leave.

The changes “signal they are trying to correct some problems,” said David Dreman, chair of Dreman Value Management, a Fannie Mae and Freddie Mac shareholder.

“When you change risk management people, it has to be viewed as recognising problems, so it is mildly positive.”

Feeling the strain

Almost all US mortgage lenders, from huge financial institutions such as Citigroup to small, local banks, rely on Fannie Mae and Freddie Mac, looking to them for the funds they need to meet consumer demand for mortgages.

The board says it remains committed to its chief executive, Daniel Mudd

The two firms argue that they make home ownership more affordable, lowering the interest rates on the 30-year mortgages that they guarantee.

Their finances have been highly strained by rising defaults and falling house prices, in light of the weakening US housing market.

As mortgage guarantors, Fannie Mae and Freddie Mac must pay out when homeowners default on their loans.

Bail-out?

Their peculiar status has left them in a grey area between being government-owned and the private sector, with potential risks to the taxpayer should they need bailing out.

The Treasury gained the authority to bail out the Freddie Mac and Fannie Mae, including buying shares in the two companies if needed, in a rescue plan approved at the end of July.

However, the Treasury has said that it has no plans bail out the two firms, which underpin the US mortgage market.

Fannie Mae’s shares have risen in recent days as investor fears that it would be nationalised subsided.

On Wednesday its shares rose 15.3%, although they fell back slightly in after-hours trading.

News reported by The BBC

Shares in US mortgage finance giants Freddie Mac and Fannie Mae rose after Freddie Mac sold around $2bn (£1bn) of short-term debt.

The move boosted confidence in the mortgage giants sending Freddie Mac stock up 17% and Fannie Mae up 3.8%.

Both lenders’ shares have fallen recently on fears that they could go bankrupt as borrowers default on loans.

Combined Freddie Mac and Fannie Mae guarantee around half of the mortgages offered in the US.

Rajiv Setia, an strategist with Barclays Capital said after the sale: “Government Sponsored Enterprises (GSE) continue to have access to funding.”

The successful sale on Monday was greeted positively by Wall Street, with analysts saying it showed confidence – at least short terms – in the lenders.

“We are not convinced that [the government] needs to take take any action over the near term,” said Citigroup analyst Bradley Ball.

Freddie Mac and Fannie Mae are a key part of the US mortgage market.

As mortgage guarantors, they must pay out when homeowners default on their loans.

But in light of the weakening US housing market, their finances have been highly strained by rising defaults and falling house prices.

News reported by The BBC

Executives at Fannie Mae and Freddie Mac, the American financial giants which sit at the core of the country’s mortgage market, were desperately fighting yesterday to preserve their independence as a federal government takeover appeared closer than ever.

Shares in the companies collapsed to lows not seen for two decades amid fears that any government-led refinancing would wipe out shareholders. Freddie Mac bosses met US Treasury officials to complain that the uncertainty was crippling their ability to find a private market solution to their problems.

The companies own or guarantee almost half of all outstanding US mortgages and have become even more important props to the mortgage market since the appetite for exotic mortgage derivatives waned last year.

Last month, the Treasury Secretary, Hank Paulson, promised to do whatever it took to shore up the companies. Their failure could plunge the US housing market into a depression, and, because Fannie and Freddie debt is so widely held by foreign governments, it could also lead to a flight of capital from the US.

Mr Paulson has insisted that the promise to backstop the companies with emergency lending or the injection of equity capital ought to shore up confidence enough to ensure that the money is never needed. However, the companies’ shares have been in freefall since reports on the weekend that the Treasury was drawing up a nationalisation plan, which it could put into effect within weeks.

On Tuesday, Freddie Mac had to pay its highest-ever interest rate relative to Treasuries, to obtain $3bn (£1.6bn) of short-term debt.

Yesterday, Fannie Mae shares lost 27 per cent of their remaining value. Freddie Mac shares shed 22 per cent.

Freddie Mac has promised to raise $5.5bn of new capital to strengthen its balance sheet, battered by billions of dollars of losses on US mortgage investments and by the falling value of its ultimate collateral, namely American houses.

In private, executives have expressed their fury that uncertainty over the Treasury’s intentions has persisted, making it impossible to reassure potential investors they won’t quickly be wiped out in a subsequent government takeover.

Fannie Mae’s chief executive, Daniel Mudd, insisted yesterday that the company had more capital than ever before and did not foresee a government takeover. “They haven’t offered anything and we haven’t asked for anything.I don’t anticipate that they will do that.”

The Treasury has consistently said it has no plans to take action and said the meeting with Freddie Mac executives was routine.

News reported by The Independent

Shares in US mortgage finance giants Freddie Mac and Fannie Mae have plunged again on fears that the government will be forced to bail out the pair.

The slide reignited concerns about the health of the financial sector and sent the US stock market sharply lower.

A report by US financial weekly Barron’s suggested that the chances of a government rescue were increasing.

However, the Treasury said that it had no plans bail out the two firms, which underpin the US mortgage market.

The Treasury gained the authority to bail out the Freddie Mac and Fannie Mae, including buying shares in the two companies if needed, in a rescue plan approved at the end of July.

The degree and depth of what’s happening in the financial industry is beyond anything we’ve seen in decades

John Merrill, Tanglewood Wealth Management

Citing an unidentified source, Barron’s said US officials anticipated that the two firms would not be able to raise the money they needed to improve their financial footing.

The paper said a government bail-out would likely wipe out existing holders of the firms’ shares. Both firms were trading near 18-year lows.

Stocks rattled

Shares of Fannie Mae fell more than 22%, or $1.76, to close at $6.15. Shares of Freddie Mac fell almost 25%, or $1.46, to $4.39.

The Dow Jones Industrial Average fell 180.51, or 1.55%, to 11,479.39 points also rattled by a Wall Street Journal report that suggested that Lehman Brothers’ quarterly earnings might be weaker than expected.

John Merrill, chief investment officer at Tanglewood Wealth Management, said investors were realising that the crisis in the financial sector was unlikely to abate any time soon.

“The degree and depth of what’s happening in the financial industry is beyond anything we’ve seen in decades and it takes time to get your arms around the severity of what’s happening and what the long-term and short-term ramifications are,” he said.

Severe stress

Shares in Freddie and Fannie fell sharply last month on fears that they would run out of money to fund their business, forcing the US government to take radical steps to ease the panic.

The two firms are the backbone of the US mortgage market as almost all US lenders rely on them to buy their mortgages in order to access the funds to lend to consumers.

As mortgage guarantors, they must pay out when homeowners default on their loans.

With the housing market across the US crumbling, their finances have come under severe stress.

News reported by The BBC

The global financial crisis is set to get worse, with a large US bank likely to collapse in the next few months, a former IMF chief economist has warned.

Kenneth Rogoff’s comments came as shares in Fannie Mae and Freddie Mac sank on a report that the home lenders would, in effect, be nationalised.

Despite hopes that the US economy had turned the corner, Mr Rogoff claimed it was “not out of the woods”.

“I would even go further to say ‘the worst is to come’,” he said.

“We’re not just going to see mid-sized banks go under in the next few months,” said Mr Rogoff, who held the IMF role between 2001 and 2004.

“We’re going to see a whopper, we’re going to see a big one, one of the big investment banks or big banks.”

“We have to see more consolidation in the financial sector before this is over” Kenneth Rogoff

Speaking at a conference in Singapore, Mr Rogoff, now an economics professor at Harvard, forecast that Fannie Mae and Freddie Mac would “probably” not exist in their present form in a few years.

“We have to see more consolidation in the financial sector before this is over.”

On Monday, shares of Fannie Mae fell more than 22%, or $1.76, to close at $6.15. Shares of Freddie Mac fell almost 25%, or $1.46, to $4.39.

‘Wrong move’

Shares in Freddie and Fannie first fell sharply last month on fears that they would run out of money to fund their business, forcing the US government to take radical steps to ease the panic.

The two firms are the backbone of the US mortgage market as almost all US lenders rely on them to buy their mortgages in order to access the funds to lend to consumers.

As mortgage guarantors, they must pay out when homeowners default on their loans.

With the housing market across the US crumbling, their finances have come under severe stress.

Problems in the US housing sector prompted the Federal Reserve to slash interest rates to 2% earlier this year.

But Mr Rogoff said the Fed was wrong to cut interest rates as “dramatically” as it did.

“Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States,” he added.

News reported by The BBC