Paulson: Keep Fannie, Freddie in current form

July 11, 2008 9:52:12 AM PDT
Treasury Secretary Henry Paulson, seeking to calm nervous investors about the financial state of Fannie Mae and Freddie Mac, said Friday the government's primary policy focus currently is to leave the congressionally created mortgage giants intact. "Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission," Paulson said.

The financial health of the two companies is of critical concern to Washington policymakers because of the crucial role they play in the housing market.

The pair hold or guarantee around $5 trillion worth of mortgages. That's roughly half of the $9.5 trillion debt of the United States. The fear is that a failure of one or both would wreak havoc on the nation's financial system and the broader economy as well.

Paulson's comments came amid reports that the government was considering a plan to take over one or both of the companies and place them in a conservatorship.

President Bush met with his senior economic advisers Friday morning at the Energy Department. Earlier, Paulson came to the White House and briefed Bush in the Oval Office on Fannie Mae and Freddie Mac. Bush said the mortgage giants are "very important institutions."

Bush said Paulson assured him that he and Federal Reserve Chairman Ben Bernanke "will be working this issue very hard."

The Treasury chief said his department is "maintaining a dialogue with regulators and with the companies." The companies' main regulator, the Office of Federal Housing Enterprise Oversight, will continue to work with Fannie Mae and Freddie Mac "as they take the steps necessary to allow them to continue to perform their important public mission," Paulson said.

Shares of the companies' stocks have plunged in recent days, with Freddie's and Fannie's down sharply on Friday as fear intensified. Investors are increasingly worried the companies will suffer more losses as housing prices keep falling and foreclosures keep rising.

And stock investors are worried the companies will have to raise a lot more money to cover those losses. By law the companies are required to hold only a fraction of what is mandated for commercial banks as a financial cushion against risk.

Congress created the companies to provide a steady stream of money for home mortgages. Although the government doesn't guarantee Fannie's and Freddie's debts, most investors believe the government would come to their rescue if the companies fell into dire straits. This "implicit" guarantee allows them to borrow money at lower interest rates than other financial companies.

The worries about Fannie and Freddie come as the government is depending on them to provide much-needed mortgage financing at a time when credit has gotten much harder to obtain.

The housing, credit and financial crises have badly pounded the economy, causing growth to slow sharply at the end of last year and at the beginning of this year and forcing employers to cut jobs.

Congress, meanwhile, is moving closer to completing action on a major housing rescue package that would include provisions to create a new regulator for Fannie and Freddie and tighten controls over them. The bills also would permanently raise the limit on the loans they may buy.

Democratic presidential candidate Barack Obama, who supports the Senate housing package, "has long believed we should take all necessary steps to ensure affordable homeownership for millions of American families and that includes an essential role for Fannie Mae and Freddie Mac," campaign spokesman Bill Burton said.

The government has been working on contingency plans to look at how to handle potential problems if they were to arise, including troubles at the mortgage giants.

"I think it would be devastating to the economy to let them go under," Sen. Charles Schumer, D-N.Y., told reporters Thursday. "We should try everything else first, but that's something that would have to be on the table ... and I think the markets should understand that. It is highly unlikely that Fannie and Freddie would go under because the federal lifeline has always been there."

Asked whether a bailout would be needed, he replied: "We don't know yet."

Some analysts, meanwhile, have suggested that the Fed should allow Fannie and Freddie to borrow money from the Fed's emergency lending program. There is no indication that the central bank is considering that.

In an unprecedented and controversial move in March, the Fed allowed big Wall Street firms to -- on a temporary basis -- directly borrow cash from the emergency facility. That privilege has been afforded to commercial banks on a permanent basis for years. With financial markets still fragile, Bernanke said earlier this week that the Fed may extend emergency lending privileges to the investment firms into next year.

Appearing before the House Financial Services Committee on Thursday, both Bernanke and Paulson made a point of saying that the regulator of Fannie and Freddie has found that both companies are adequately capitalized.

Both officials on Thursday avoided saying anything about Fannie and Freddie that would would further roil the markets.

Two years ago, however, Bernanke, appearing before the same panel, warned that the companies massive holdings "present a systemic risk" to the U.S. financial system.


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