Justice Dept Says Tsy Legally Bound To Inject Capital Into GSEs
12/05 02:34 PM
WASHINGTON (Dow Jones)--The U.S. Justice Department believes holders of debt issued by Fannie Mae (FNM:$0.8499,$-0.0201,-2.31%) and Freddie Mac (FRE:$0.8397,$-0.0403,-4.58%) can bring suit against the U.S. if the Treasury reneges on its commitment to inject capital into the mortgage firms.
The legal opinion, issued in a Sep. 26th letter to Treasury Secretary Paulson, should give some assurance to debt investors that Treasury's agreement to inject up to $200 billion in capital into the firms will hold up in court.
"It buttresses the Treasury backstop, although it's still short of a full guarantee," Karen Shaw Petrou of the consultancy Federal Financial Analytics said.
A lack of investor confidence in the agreement helped cause Fannie's and Freddie's borrowing costs to soar earlier this fall amid investor fears about their solvency.
Despite the agreement and the government's seizure of the firms in September, officials say the firms' debt has an "effective" federal guarantee, rather than an explicit guarantee.
The legal opinion was cited in a document released by the Federal Housing Finance Agency Friday. The document was issued by the Justice's Office of Legal Counsel and is posted on its website.
"In the event Treasury fails to perform its obligations to either of the GSEs in respect of any draw on the commitments, those (debt) holders may file claims in the United States Court of Federal Claims for relief requiring Treasury to pay the relevant GSE a specified amount in the form of liquidated damages," Principal Deputy Assistant Attorney General Steven G. Bradbury wrote in the letter.
-Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@ dowjones.com
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12-05-081434ET
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