Officials grilled on Fannie, Freddie rescue tab

By Emily Kaiser

WASHINGTON (Reuters) - U.S. officials sought to quell concerns on Tuesday that rescuing Fannie Mae and Freddie Mac would amount to a blank check signed by taxpayers, while investors dumped shares of the mortgage finance companies amid fresh worries over their financial health.

U.S. Treasury Secretary Henry Paulson, who orchestrated Sunday's plan to bolster Fannie and Freddie, said the pledge to extend more credit or buy stakes in the companies was designed to be a backstop. The government had no intention of investing public funds in the mortgage companies right now, he said.

At a hastily organized Senate Banking Committee hearing, where Paulson appeared alongside Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox, tensions flared as members of Congress deplored the potential risks to taxpayers should Fannie and Freddie deteriorate further.

"I think you could be risking the taxpayer's dollar here," said Sen. Richard Shelby, the top-ranking Republican on the committee. Shelby said Congress would need to consult with Treasury before signing off on a "blank check".

The SEC also announced that it would issue an emergency rule to stop some forms of short selling in major financial firms, including Fannie and Freddie, which have lost about half their value since the start of last week.

Short sellers borrow shares that they consider overvalued and sell them. If the price drops, they repurchase the shares, return them, and pocket the difference. In a "naked" short sale, the type the SEC now wants to curb, the investor sells stock that has not yet been borrowed.

Fannie (FNM.N) and Freddie (FRE.N) shares fell more than 25 percent, hurt by concerns over how shareholders would fare should the government take over the companies. A credit rating agency cut their financial strength ratings, adding to fears.

There was also less demand for the companies' debt even though investors say the proposed rescue favors creditors.