WASHINGTON (AFP) — Federal Reserve chairman Ben Bernanke said Wednesday ailing Fannie Mae and Freddie Mac are "in no danger of failing," helping fuel a big boost in the troubled finance sector as fears of a deeper crisis eased.
Bernanke's comments in Congress coincided with a sharp rebound in shares of the beleaguered mortgage-finance titans and a snapback in the banking sector as fears faded about a meltdown in the global financial system.
Shares in Fannie Mae leapt 31 percent to 9.25 dollars and Freddie Mac climbed 29.8 percent to 6.83. Yet both are down more than 75 percent for the year.
The turmoil of the past week appeared to ease as markets assessed the outlook for the banking system and the portfolios of Fannie and Freddie, shareholder-owned government-sponsored enterprises (GSEs) which underpin some five trillion dollars in mortgages.
"The GSEs are adequately capitalized. They are in no danger of failing," Bernanke told lawmakers of the House of Representatives in a second day of testimony to Congress on the central bank's semiannual economic report.
"However, the weakness in market confidence, this is having real effects as their stock prices fall, (and) it's difficult for them to raise capital."
Bernanke said the loss of confidence could prompt higher rates on bonds of the two firms, and accordingly increase their borrowing costs.
"As I said yesterday, I think the housing market is really the central element of this crisis," Bernanke said to the House Financial Services Committee.
"And anything we can do to strengthen the housing market, to strengthen mortgage finance would be beneficial."
Fannie and Freddie have seen their shares pounded in recent weeks amid fears they might be unable to cover losses among the trillions of dollars in home loans they own or guarantee.
The crisis has prompted the Fed to open up its discount window to the two firms and President George W. Bush's administration has proposed other steps to help shore up confidence.
Fears of a banking crisis had mounted since the failure last week of California-based Indymac.
Wells Fargo, another California-based bank, reported Wednesday a stronger-than-expected quarterly profit of 1.8 billion dollars and boosted its dividend, propelling other banking shares higher.
Fred Dickson, a market analyst at DA Davidson and Co., said a new emergency rule ordered by stock market regulators to curb some speculative "short sales" of key financial firms could help steady the market.
"The moves ...should eliminate some of the huge market volatility in these issues thus restore some stability to the overall market," Davidson said.
The Securities and Exchange Commission, in issuing its new rule, stated: "False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by 'naked' short selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process."
As financial markets appeared to steady, the Fed released minutes from its June policy meeting showing ongoing uncertainty about the economic outlook.
But policymakers agreed at their meeting last month that their next move on interest rates would probably be an increase, after a series of easing moves, the minutes showed.
"With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate," the minutes said.
"Indeed, one member thought that policy should be firmed at this meeting. However, in the view of most members, the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and magnitude of future policy actions was quite unclear."
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