Topics:Credit | Housing | Mortgages | Subprime Lending | 12 Jul 2008 | 10:51 AM ET Font size:
Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to two sources familiar with the conversation between Bernanke and Syron.
Ben Bernanke Dennis Cook / AP Federal Reserve Bank Chairman Ben Bernanke
Fed spokeswoman Michelle Smith said U.S. central bank officials were following the situation with struggling Fannie Mae and Freddie Mac closely but disputed that access to the discount window had been offered.
"Federal Reserve officials are following the situation closely. However, there has been no discussion with the GSEs about access to the discount window," Smith said in a statement issued on Friday afternoon.
On Friday night, a Fed spokeswoman confirmed that there had been a call between Bernanke and Syron on Thursday initiated by Syron. But she said there was no discussion during that call about Freddie Mac or Fannie Mae accessing the discount window.
However, two sources familiar with the conversation between Syron and Bernanke later affirmed the conversation and what was said about potential discount window action.
The two sources said Bernanke and Syron spoke by phone Thursday afternoon and in that call the central bank chief said he intended the discount window to be opened if necessary to Fannie Mae and Freddie Mac.
A senior senator said at a press conference on Friday afternoon that such action was among a range of possibilities under discussion to help the struggling mortgage lenders weather a crisis of confidence.
"I know that both the Fed and the Treasury are looking at various options...including things like the discount window," Senate Banking Committee Chairman Chris Dodd told a news conference on Capitol Hill on Friday.
"I don't want to draw any conclusions about it yet but they are certainly examining what other means might be necessary in order to shore up the situation," the Connecticut Democrat said.
Freddie Mac declined comment when asked about a phone call between Bernanke and Syron. Fannie Mae declined to comment on access to the discount window.
Fannie and Freddie shares have been pummeled in stock markets amid reports that the Bush administration was considering contingency plans for taking over one or both of the companies and placing them in a conservatorship if their problems deepened.
But Treasury Secretary Henry Paulson effectively rejected any plan to nationalize the companies, saying the administration's focus was on supporting the companies "in their current form."
A former president of the St. Louis Federal Reserve Bank, William Poole, said in an interview with Reuters on Friday that the Fed likely could open its emergency lending facility to the mortgage lenders under the same circumstances that were in play when it gave investment banks access in March.
Poole, a 10-year Fed veteran, said the U.S. central bank would probably have the authority to open the discount window to Fannie and Freddie under the "unusual and exigent" circumstances it cited in March.
But he did not think such a drastic step would be necessary, noting that the Fed could simply purchase the GSEs' debt directly and hold it on the Federal Reserve system's open market portfolio.
(20min delay)