Paulson and Bernanke Come to the Rescue of Fannie Mae and Freddie Mac

The U.S. government flew to the rescue of GSEs Fannie Mae and Freddie Mac over the weekend with Treasury Secretary Henry Paulson announcing that the government would increase the failing bond insurers' line of credit, have the temporary ability to purchase equity and that the Fed would be available to make emergency loans.

"GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets," Paulson said in a statement. "Therefore we must take steps to address the current situation as we move to a stronger regulatory structure."

Although Paulson has worked closely with leaders from both parties, the plan remains subject to congressional approval.

Nevertheless, the Fed did announce discount-window lending to Fannie Mae and Freddie Mac if necessary.

"This authorization is intended to supplement the Treasury's existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets," reads a statement on the Fed's website.

Under the discount-window lending terms, the Fed can lend against U.S. government security and agency collateral.

Last week, both GSEs saw their stock plummet over 45% and are considered crucial to the financial system in that they insure over $12 trillion in U.S. mortgages.

By Erik Kevin Franco and edited by Nancy Girgis