WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress Wednesday that troubled mortgage giants Fannie Mae and Freddie Mac are in "no danger of failing."
Bernanke made his remarks to the House Financial Services Committee, his second day on Capitol Hill where he briefed lawmakers on the problems plaguing the economy.
Bernanke appeared amid a backdrop of fading confidence in the U.S. financial system and in the national economy.
The Fed and the Treasury Department on Sunday came to the rescue of mortgage giants Fannie Mae and Freddie Mac, officially named Federal National Mortgage Corp. and Federal Home Loan Mortgage Corp., respectively, offering to throw them a financial lifeline.
The two companies hold or guarantee more than $5 trillion in mortgages, almost half of the nation's total, and are major sources of financing for the mortgage market.
The Bush administration is asking Congress to increase lines of credit temporarily to the companies and to let the government buy their stock. The Fed has offered to let the firms draw emergency loans.
The pledges of aid have raised concerns on Capitol Hill and elsewhere about the government's role in intervening to ease such financial troubles and the risk posed to taxpayers.
The two mortgage giants are "adequately capitalized," Bernanke said. However, "weakness of market confidence is having an effect" on the companies, making it difficult for them to raise capital.
The companies' shares have plunged as losses from their mortgage holdings threatened their financial survival.
The rescue plan was intended to send a signal to nervous investors worldwide that the government is prepared to take all steps necessary to prevent the credit market troubles that started last year from engulfing financial markets and further weakening the economy and housing markets.
"We will work our way through these financial storms," Bernanke said.
Treasury Secretary Henry Paulson told Congress on Tuesday that he hoped this lifeline won't need to be used. He said the pledge was aimed at boosting eroding investor confidence in the companies.
Bernanke said the "best solution" is to keep Fannie and Freddie "in their current form," as opposed to having the government take them over. It is also vital for Congress to boost regulatory oversight on the two companies, he said.
Such powers are contained in a sweeping housing-rescue package, and Congressional leaders plan to add to the bill the provisions Paulson is seeking to aid Fannie and Freddie.
The Fannie and Freddie troubles came on the heels of the failure of IndyMac Bank. Earlier this year a run on investment bank Bear Stearns pushed the company to the edge of bankruptcy and into a takeover by JPMorgan Chase, backed financially by the Fed.
"How long before we hear a splash? Is there a bottom?" asked Rep. Emanuel Cleaver, a Missouri Democrat, about the financial troubles.
Spencer Bachus of Alabama, the panel's most senior Republican, said of the housing boom-to-bust situation: "Fortunes were made on the way up and pain will be felt on the way down."
With the bust, banks and other financial companies have racked up huge losses due to soured mortgage investments. Foreclosures have risen to record highs.
For the second day in a row, Bernanke outlined the economy's problems, including a housing slump, financial turmoil, credit troubles, and high energy and food prices. In addition, employers have cut jobs for six straight months.
"Families are facing hardships ... this is clearly a rough time," Bernanke said. "It is clear (economic) growth has been slow and the labor market is weak."
The situation is tough on the Fed too. Caught between risky cross-currents of plodding growth and rising inflation, Fed policymakers are facing "significant challenges" as they try to find a way to right the economy, Bernanke told lawmakers.