Fed plan spurs Fannie rally

Stocks rallied Tuesday as traders embraced the latest government efforts to ease the pressure on the financial system. The Fed said Tuesday morning it will expand its securities lending program to permit banks to use triple-A, private-label, mortgage-backed securities as collateral. The Fed said it will lend as much as $200 billion in this fashion over 28 days, rather than overnight as previously.

The decision set off a sharp rally in shares of big mortgage lenders such as Fannie Mae (FNM), Freddie Mac (FRE), Countrywide (CFC) and Washington Mutual (WM), all of which had swooned in recent days amid fears that the near collapse of leveraged mortgage investors such as Carlyle Capital would flood the market with more mortgage bonds.

The new program, called the TSLF for term securities lending facility, adds to a range of government-sponsored efforts to unlock the credit markets. At the end of last year the Fed used another novel program, the TAF or term auction facility, to bring interbank lending rates down. Those rates have spiked again this month, but Jeff Miller, CEO of investment adviser NewArc Investments in Naperville, Ill., says investors make a mistake when they discount the government’s capacity for devising solutions to messy problems such as the credit crunch.

“Wall Street analysts do not understand how government works,” he wrote last week at his Dash of Insight blog. “Because the pace of action is slower than trading they infer stupidity and ignorance.  This is not true. Solutions develop, but not always at the pace we hope for.”