The stock and mortgage bond markets were in turmoil last week as rumors circulated that Fannie Mae and Freddie Mac were on the edge of insolvency. Not just the mortgage market but our entire economy are dependent on the health of these organizations. It’s always been assumed that the government would do whatever was necessary to keep them afloat. The question was more a matter of what they would do to support them, whether the stock would remain solvent and who would foot the cost.

Tonight the Fed stepped in and announced a deal had been put together, just before the Asian markets opened. This was the same way they put together the Bear Stearns buy out in March, and like then it was designed to calm the markets and avoid a sell off that could have gotten out of control. This deal will increase the Treasury credit line for Fannie and Freddie, and  gives the Treasury the authority to buy the companies stocks.

By promising bold action the Fed and the Treasury hope to re-instill confidence, in the hopes that they won’t have to do a full scale bail out down the road. Here’s a Wall Street Journal Article which gives the specifics.

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