Tuesday, July 22, 2008

Paulson Says Fannie Mae-Freddie Mac Rescue Is Needed to Stabilize Markets

Paulson Cites Global Stakes in Fannie-Freddie Rescue

By Kathleen Hays and Rebecca Christie

Go To Original

Treasury Secretary Henry Paulson, trying to persuade Congress to approve his rescue plan for Fannie Mae and Freddie Mac, said U.S. financial market stability is at stake and international investors are awaiting the outcome.

‘‘This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson said in an interview with Bloomberg Television today. ‘‘This goes well beyond the two institutions -- Fannie and Freddie -- it has to do with investors in the United States and investors all over the world.''

The Treasury chief said his plan is about restoring confidence in the two companies, which account for almost half the $12 trillion U.S. mortgage market, and he doesn't expect to have to use taxpayer funds. Paulson predicted that lawmakers will back his proposals, which would give him the right to buy equity in and lend funds to Fannie Mae and Freddie Mac.

‘‘I am confident they recognize the demands of the current situation, and will act to complete work on this legislation this week,'' Paulson said in a speech at the New York Public Library earlier today. ‘‘We must, in the short term, take steps to boost confidence'' in the firms, he said.

Paulson plans to talk with lawmakers when he returns to Washington later today, spokeswoman Michele Davis said. He made two trips to Capitol Hill last week to lobby for his plan after legislators criticized the proposals in a Senate Banking Committee hearing he attended. They expressed concern that the authority could expose taxpayers to unlimited liability.

Taxpayer Funds

‘‘We have no plans right now to put capital in,'' he said in the interview. ‘‘It's very important that the markets know that we're there with capital if necessary,'' Paulson said.

Paulson's outlook is ‘‘far from the only possible result,'' the Congressional Budget Office said today, estimating the cost of his plan at $25 billion. ‘‘Many analysts and traders believe that there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected'' on the two companies' balance sheets.

‘‘Such continuing problems would increase the probability that this new authority would have to be used,'' said the CBO, a nonpartisan agency that provides economic and budget analysis for lawmakers.

Fannie Mae fell 95 cents, or 6.7 percent, to $13.18 at 11:27 a.m. in New York Stock Exchange composite trading. Freddie Mac dropped 41 cents, or 4.7 percent, to $8.34. Fannie has dropped about 42 percent in the past month, and Freddie is down about 58 percent, on concern the companies have insufficient capital to cover writedowns and losses amid the mortgage-market collapse.

‘Divisive' Measures

Paulson urged Congress not to include ‘‘extraneous'' or ‘‘divisive'' measures in the housing bill, which the House expects to pass tomorrow. The legislation originally was designed to set up a stronger regulator for Fannie Mae and Freddie Mac, and provide for mortgage guarantees to help stem foreclosures.

The Treasury chief asked in an emergency statement on Sunday, July 13, that the bill include the right for the Treasury to buy equity in Fannie Mae and Freddie Mac, and expand their lines of credit. He also urged a role for the Federal Reserve in overseeing the companies' capital.

Democratic lawmakers in the House want to add $4 billion to the bill to provide funds for authorities to buy foreclosed properties, and ease the damage to communities. President George W. Bush's administration has repeatedly threatened to veto the housing bill if it includes the measure.

Wasting Time

‘‘We shouldn't be spending time debating extraneous provisions which I think are counterproductive,'' Paulson said on Bloomberg Television. The GSE-related items in the bill are ‘‘orders of magnitude'' more important than any other items, he said.

‘‘Both sides'' will work to avoid a veto of the bill, he said later on Fox Business Network.

The Treasury chief said that he's worked since 2006 to get Congress to set up a stronger regulator for the two government- sponsored enterprises, recognizing the risks they posed to markets because of their size.

‘‘I would rather not be in the position of asking for extraordinary authorities to support the GSEs'' now, Paulson said. ‘‘But I am playing the hand that I have been dealt.''

Answering questions after his speech, he said that any aid to Fannie Mae and Freddie Mac would be ‘‘collateralized,'' helping provide protection for taxpayers.

Assessing Finances

Paulson also said the Fed and Office of the Comptroller of the Currency are helping assess Fannie Mae and Freddie Mac finances. There is a discrepancy between the judgments of investors and the firms' current regulator, the Office of Federal Housing Enterprise Oversight, he said in an interview with the New York Times yesterday, the paper reported.

The Treasury chief today said he has ‘‘confidence'' in Ofheo, which has said Fannie Mae and Freddie Mac are adequately capitalized.

‘‘The Federal Reserve is working with Ofheo to get a better understanding of the issues facing the GSEs,'' Fed spokesman David Skidmore said today. He said the Fed doesn't have examiners on site at the companies.

Financial market turmoil will take ‘‘additional time'' to be resolved, and progress ‘‘won't come in a straight line,'' Paulson reiterated in his speech. ‘‘Until the housing market stabilizes further, we should expect some continued stresses.''

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