WASHINGTON (MarketWatch) -- The implicit government guarantee of Fannie Mae and Freddie Mac is now explicit.

In a dramatic statement released Sunday, the White House and Federal Reserve moved to give the mortgage giants the capital they need to survive the depression in the housing market and turmoil in financial markets that had left them dangling over a cliff.

Of most immediate importance, the Fed's board of governors voted to open up its emergency discount window to Fannie and Freddie.

In addition, Treasury Secretary Henry Paulson announced that he will seek congressional authorization to buy stock in the two companies and increase the government's credit line.

At the moment, each company may borrow only $2.25 billion.

In return for the capital, Paulson said that the Bush administration would ask Congress to grant the Fed a "consultative" role in the capital standards of the companies.

The housing rescue package that is nearing final approval by Congress would put in place a strong independent regulator for the companies is slowly moving through Congress. Paulson says he wants a new provision allowing the Fed to work hand-in-hand with the new agency.

That would be a bitter pill for Fannie and Freddie, which have been at loggerheads with the central bank over the capital issue for years.

It is not clear how Congress will react to Paulson's request. The Treasury secretary said he has been in close contact with the Congressional leadership over the weekend, so his request will not come as a surprise to lawmakers.

It would be logical to attach the lifeboat for Fannie and Freddie to the housing rescue measure.

The Senate passed its version of the legislation last week and sent it back to the House for another vote. It is expected to get to President Bush for his signature before Congress leaves town for its summer recess at the beginning of August.

The House Republican leadership vowed to put politics aside to craft legislation.

Stability is the goal

Fannie and Freddie are strange hybrid companies, known as government-sponsored enterprises.

They were chartered by Congress but are owned by private shareholders.

For years, Wall Street has believed that the government would never allow Fannie and Freddie to default. The companies have been able to sell debt at lower prices than their competition.

But the agencies have grown to mammoth size. They own or guarantee $5.2 trillion of U.S. home mortgages.

Investors have fled in recent months as the housing market downturn and financial market turmoil have shown no sign of ending.

In the past week, the selling intensified and Freddie and Fannie each lost half their value in volatile stock trading. Talk of some form of government action rose as the week went on.

White House Press Secretary Dana Perino said in a statement that the plan "will help add stability during this period."

Paulson said the global reach of Fannie FNM, +0.85% and Freddie FRE, -0.64% necessitated unprecedented action.

"GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets," Paulson said.

"The problems with Fannie Mae and Freddie Mac are pretty straightforward. Combined, the two GSEs have about $95 billion in capital but hold over $ 5 trillion in mortgages. With home prices falling and mortgage delinquencies rising, doubts are beginning to surface as to whether or not they have enough capital to ride out the housing slump. The math is pretty daunting," said Mark Vitner, senior economist at Wachovia.

In prepared statements, Fannie and Freddie said they welcomed the steps outlined by the Treasury and the Fed, while insisting that they were adequately capitalized.

Robert Mudd, the CEO of Fannie Mae, said the option to use the discount window should restore confidence of its stakeholders.

Richard Syron, the CEO of Freddie Mac, said the company's quarterly results that are being finalized and would show "we have a substantial capital cushion above the 20% mandatory target surplus established by our regulator."

James Lockhart, the head of the Office of Federal Housing Enterprise Oversight (OFHEO) that regulates Fannie and Freddie, stressed that the two firms can survive.

The two firms have "$95 billion in total capital, their substantial cash and liquidity portfolios, and their experienced management serve as strong supports for [the GSE's] continued operations," he said in a statement.

Reaction

Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote that the package unveiled by Paulson and the Fed seems "designed to forestall a full rescue."

"At the same time, the access to credit via the Treasury and Fed means the implicit guarantee on the GSEs' debt is now explicit," he said.

Shepherdson said he thought the plan would be positive for stocks and negative for Treasuries, but he said the sell-off in government notes and bonds would not last long given the weak state of the economy.

Peter Schiff, president of Euro Pacific Capital, predicted that the package would put downside pressure on the dollar. He said letting the two firms collapse was preferable to a bailout and said the package announced amounted to sticking a finger into a leaking dam that was going to burst one way or another.

Because of the plan, it would burst through a surge of inflation, he said.

Details

In his statement, Paulson said the increase in the line of credit would be temporary and he gave no details of how much on an increase was under consideration. The department would determine the terms and conditions for accessing the credit, he said.

The ability to purchase stock would also be temporary. And use of either "would carry terms and conditions necessary to protect the taxpayer."

But analysts saw signs of an end of an era.

"Looking further ahead, [Fannie and Freddie] will face a much different operating environment, and not before time. Private companies where the taxpayer takes all the downside risk don't make much sense," Shepherdson said.