Treasury, Fed take bold steps to back Freddie and Fannie

By Glenn Somerville and Alister Bull

WASHINGTON (Reuters) - The U.S. Treasury and Federal Reserve on Sunday unveiled sweeping steps to support Fannie Mae and Freddie Mac if needed to bolster confidence in the troubled mortgage financing giants and head off a potential meltdown in global financial markets.

In moves that could mean a major escalation in U.S. taxpayer exposure, the Fed said the companies could access its discount window for emergency cash. The Treasury separately said that it would temporarily increase its line of credit to the two, as well as purchase equity in them, if needed.

The move by the Fed echoed its emergency action to help rescue investment bank Bear Stearns in March, when it opened the discount window to investment banks for the first time since the Great Depression.

"(Their) continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore, we must take steps to address the current situation as we move to a stronger regulatory structure," Treasury Secretary Henry Paulson said in a statement that he read on the steps of the Treasury building.

A senior Treasury official said all the actions it proposed need Congressional approval, but expressed confidence that could be secured within this week.

Charles Schumer, Democratic Senator for New York, praised the plan and said that it should boost investor confidence in Fannie Mae and Freddie Mac, both shareholder-owned but government-sponsored enterprises whose shares have plummeted.

The dollar edged higher against the euro and the yen on the news, which came before a crucial sale of $3 billion in 3- and 6-month notes by Freddie Mac on Monday.

Stock futures also gained in relief at this muscular evidence of official U.S. support which follows a battering week on Wall Street.