Paulson taps Morgan Stanley for Freddie, Fannie advice
Treasury says firm will help it with options under new authority.
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NEW YORK (CNNMoney.com) -- The Treasury Department retained Wall Street's Morgan Stanley on Tuesday to advise it on its new authority to prop up troubled mortgage financiers Fannie Mae and Freddie Mac.
Treasury Secretary Henry Paulson reached out to Morgan CEO John Mack to submit a proposal to assist the agency in the event it needs to expand the government's line of credit or buy stock in the companies. Congress approved these measures in late July to shore up confidence in the faltering firms, which are currently keeping the U.S. mortgage market operating.
Morgan will provide advise on capital markets, capital structure, strategy and mortgage-related matters through January 17. It will not be paid for the work, beyond accepting $95,000 for expenses.
In a briefing, Treasury officials said the government does not plan to utilize the temporary authority. Morgan was chosen after a competitive process, Treasury said.
"This action should be interpreted as a prudent preparedness measure, and nothing more," said Brookly McLaughlin, a Treasury spokeswoman.
Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages, about half the nation's total.
The move came a day ahead of Freddie Mac's announcement that it lost $821 million, or $1.63 a share, in the second quarter, much worse than expected. Fannie Mae is scheduled to announce results on Friday.
On July 30, President Bush signed into law a bill giving Paulson extraordinary authority to lend a financial hand to Fannie and Freddie if the Treasury deems it necessary to help stabilize markets. The provisions expire in 18 months.
Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay.
Paulson has said that merely having the powers in place may boost confidence in the two companies enough to preclude the need for Treasury to step in.
The Congressional Budget Office last month estimated the potential cost of a rescue could be $25 billion. CBO said there is probably a better than 50% chance that Treasury would not need to step in. It also said there is a 5% chance that Freddie's and Fannie's losses could cost the government $100 billion.
Concerns over whether Fannie and Freddie will have enough money to weather future losses in the housing market have sent shares plummeting.
Shares of Freddie (FRE, Fortune 500) were down 11% and Fannie (FNM, Fortune 500) slipped 8% in late-morning trading. So far this year, shares of the twin mortgage buyers are down 76% and 66%. 
