Should this legislation pass this week, we might see a further run up in financial stocks. Fannie Mae (FNM) and Freddie Mac (FRE) both of which looked like they were heading for intensive care just a couple weeks ago, have had phenomenal run-ups in their stock prices on the possibility that the government will step in to make sure they stay viable going concerns. Both stocks are up around 85% since July 15th.

Following is an excerpt from a speech Paulson gave in New York city yesterday:

“The first phase of our proposal is aimed at immediate market confidence and stability. I have asked Congress to provide temporary authority for 18 months to provide a liquidity backstop and a capital backstop to the GSEs. There are no plans to access either of these. As I assured Congress last week, if using either of these authorities does become necessary, we would do so only under terms and conditions that protect the U.S. taxpayer and are agreed to by both Treasury and the GSE.

We need to act in the short-term because the GSEs are vital institutions in our capital markets today and are vital to emerging from the housing correction. We also know that for long-term market stability we must address the potential systemic risk these entities pose to taxpayers and markets going forward

That’s why we are urging Congress to finish legislation creating a world-class GSE regulator, including a consultative role for the Federal Reserve in the new GSE regulator’s process for setting capital requirements and other prudential standards. As this new regulator implements its mandate, we expect and welcome a larger examination of the structural issues inherent in these GSEs, so that we don’t find ourselves in this same position again in the future.

I have been consulting closely with members of Congress from both houses and both sides of the aisle. I am confident they recognize the demands of the current situation, and will act to complete work on this legislation this week.”

Source: Reported by Stocks And Options Blog http://www.navivest.com/blog/