Fannie, Freddie must not be allowed to fail: Poole

By Alister Bull

WASHINGTON (Reuters) - Fannie Mae and Freddie Mac are too big to fail and must be kept alive to avoid a crisis of "unspeakable magnitude," a former top Federal Reserve policy-maker said on Friday.

"Clearly they must be supported. They (the U.S. government) cannot allow that amount of assets ... to go into limbo," said William Poole, former president of the Federal Reserve Bank of St. Louis, who retired at the end of March.

"It would produce a worldwide financial crisis of unspeakable magnitude if they were allowed to default," Poole, a long-time critic of the government-sponsored mortgage institutions, told Reuters in an interview.

Fannie Mae and Freddie Mac own or guarantee $5 trillion of debt, almost half of all U.S. mortgages. Their shares have tumbled on fears they might run short of capital, spawning speculation of a government bailout.

A newspaper article floating the prospect of a government takeover forced U.S. Treasury Secretary Henry Paulson earlier on Friday to issue a statement stressing that he was committed to backing Fannie and Freddie in their current form.

Paulson also said that he was supporting them as they took the "steps necessary to allow them to continue to perform their important public mission".

One option could be throwing them a lifeline to the Fed's discount window for emergency cash, echoing action taken by the Fed to help rescue U.S. investment bank Bear Stearns when it nearly collapsed in March.

Poole, a 10-year Fed veteran, said the U.S. central bank would probably have the authority to open the discount window to Fannie and Freddie under the "unusual and exigent" circumstances it invoked back in March, when discount window privileges were extended to other investment banks.