Bernanke strikes note of confidence

He tells Congress Freddie, Fannie 'in no danger of failing'

Associated Press

July 17, 2008

WASHINGTON - When Missouri Democrat Emanuel Cleaver II asked Federal Reserve Chairman Ben S. Bernanke yesterday when the nation's financial woes would end, he was expressing the yearning of many on Main Street and Wall Street that the yearlong pain would soon be over.

"Is there a bottom? And, if so, how long before we hear a splash?" Cleaver asked during Bernanke's testimony before the House Financial Services Committee on the problems affecting the economy.

In back-to-back appearances before Congress, Bernanke sought to soothe nerves frazzled by rising prices for food and oil, slumping home values and faltering banks.

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

Bernanke focused on one of those maelstroms yesterday, when he said troubled mortgage giants Fannie Mae and Freddie Mac are in "no danger of failing."

Trying to stem eroding investor confidence in the two companies, the Treasury Department and the Fed on Sunday offered to throw them a financial lifeline if they needed it to stay afloat. 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.

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. Those 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.

Seeking to strike a note of confidence, Bernanke said Fannie and Freddie are "adequately capitalized. They are in no danger of failing."

However, "the weakness in market confidence is having real effects as their stock prices fall, and it's difficult for them to raise capital. If their debt spreads widen, it'll increase the borrowing costs," he said.

The companies' shares have plunged as losses from their mortgage holdings threatened their financial survival. They clawed back some ground yesterday, however, when Wall Street got a lift from a dip in oil prices. Fannie shares gained 30.8 percent to close at $9.25. Freddie shares rose 29.9 percent to $6.83.

Bernanke said the "best solution" is to keep Fannie and Freddie "in their current form" as opposed to having the government take them over. It is also vital for Congress to boost regulatory oversight on the two companies. Such powers are contained in a sweeping housing-rescue package. Congressional leaders plan to add to the bill the lifeline Treasury Secretary Henry M. Paulson Jr. is seeking to aid Fannie and Freddie.

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."

With the bust, banks and other financial companies have racked up huge losses because of soured mortgage investments. Foreclosures have risen to record highs.

The Fed chief was upfront about the economy's problems, including a housing slump, financial turmoil, credit troubles and high energy and food prices. And, employers have cut jobs for six straight months.

"Families are facing hardships ... this is clearly a rough time," Bernanke said. "It is clear [economic] growth has been slow and the labor market is weak. So conditions are tough on average families."

Rep. Barney Frank, a Massachusetts Democrat and chairman of the Financial Services panel, said: "I think conditions clearly call for a second stimulus." He's among the Democrats in Congress exploring more economic stimulus efforts to follow up on the $168 billion package, including tax rebates, enacted earlier this year.

Bernanke said it was too soon to go that route, but he didn't rule out such a course of action.