Treasury hires Morgan Stanley as GSE adviser

WASHINGTON (Reuters) - The Treasury said on Tuesday it hired Morgan Stanley (MS.N) to advise it on whether housing finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) are adequately capitalized as the government tries to determine how it would use its new powers to support the two companies.

The Treasury said it has no immediate plans to provide support to Fannie Mae and Freddie Mac, the two largest U.S. providers of housing finance that together guarantee more than $5 trillion of mortgage assets, but wants to understand how it would use its new powers if needed.

Sweeping housing rescue legislation enacted last week gave the Treasury temporary authority to make loans and provide equity to Fannie Mae and Freddie Mac to keep them viable providers of mortgage finance.

The move is aimed at shoring up investor confidence in the two government-sponsored enterprises at a time when their liquidity is needed to help end a crippling slide in the American housing market.

The Treasury said Morgan Stanley won a competitive bid process to conduct a "sensitivity analysis" of the companies' financial profiles and provide an assessment of appropriate capital structures for the two firms.

The Treasury acknowledged that the move by Treasury Secretary Henry Paulson, a former chief of Goldman Sachs, to hire a Wall Street firm for advice on stabilizing markets is an unusual occurrence.

But it said it had a responsibility to taxpayers and the financial system to analyze and understand its new powers.

MORGAN TO BE PAID FOR EXPENSES ONLY

The Treasury will pay Morgan Stanley's expenses of $95,000 under the contract, which runs until January 17, 2009, three days before the next U.S. president will be sworn into office. Morgan Stanley will receive no fees for the assignment.

The Treasury said Morgan Stanley's advisory services will help it understand the new authorities, "should circumstances ever warrant their use.

"As we've said before, we have no plans to utilize the temporary authorities. That has not changed. This action should be interpreted as a prudent preparedness measure and nothing more."

A Treasury spokeswoman said Morgan Stanley would not have access to Fannie's and Freddie's internal books in conducting its analyses. The Treasury will work with the GSEs' new regulator, the Federal Housing Finance Agency, on a range of issues, she added.

The head of the FHFA, James Lockhart, on Monday told Reuters that the regulator is mulling fresh capital standards for Fannie and Freddie. Capital adequacy levels are established to provide a cushion against possible losses on investments.

In a separate statement, Morgan Stanley said it would support the Treasury's work to promote market stability and the availability of mortgage credit.

It said the $95,000 would cover expenses only and would not include any fees for its work.

A Morgan Stanley spokeswoman said the company will use its usual procedures to prevent any conflicts between its banking and trading operations. Morgan Stanley will not underwrite securities for the two companies while it is advising Treasury, she said.

While Morgan Stanley's business trading in securities of Fannie Mae and Freddie Mac could give the appearance of a conflict of interest in its advisory role to the government, analysts said Treasury likely had little choice.

"If you want that expertise, you've got to deal with someone in the business. I don't know how you get around it," said Bert Ely, a banking consultant in Alexandria, Virginia.

(Additional reporting by Dan Wilchins and Pedro Nicolaci da Costa in New York; Editing by Leslie Adler)