Paulson Says Changes Needed At Fannie, Freddie
Treasury Secretary Henry Paulson on Wednesday said the best option for the future of Fannie Mae and Freddie Mac could be for the mortgage giants to be run like public utilities.
In what could be his last speech as Treasury secretary, Paulson said that allowing the two companies to return to their previous operating approach was not an option.
Fannie Mae and Freddie Mac were taken over by the government in September and placed in a conservatorship after mounting mortgage losses put them in operating distress that was a prelude to the broader financial crisis that hit Wall Street last year.
Under Paulson's proposal, Congress would replace Fannie and Freddie with one or two private sector entities that would purchase and securitize mortgages with a credit guarantee backed by the federal government. The new companies would be privately owned but governed by a rate-setting commission that would establish a targeted rate of return, he said.
Paulson said this approach "could be the best way to resolve the inherent conflict between public purpose and private gain."
Congress and the next administration must decide the proper role government should play in supporting home ownership in light of the severe economic costs imposed on the nation from the bursting of the housing bubble, Paulson said.
"With the knowledge of recent experience, we have a responsibility to begin work now on a long-term (government sponsored enterprises) structure which avoids the dangerous mix of policy and market distortions created by the former flawed GSE mode," he said.
Paulson offered his thoughts on a variety of possible solutions in his remarks before the Economic Club of Washington. He found fault with most of the other proposals he examined.
One option would be to remove all direct and indirect government support and privatize the companies by breaking them up and selling them. But drawbacks to that approach included that it would likely offer a low rate of return to potential investors, he said.
"I am skeptical that a 'break it up and privatize it' option will prove to be a robust or even viable model of any substantial scale without some sort of government support or protection," Paulson said.
Washington-based Fannie Mae and McLean, Va.-based Freddie Mac own or guarantee around half of the $10.6 trillion in U.S. outstanding home loan debt.
Responding to a question after his speech, Paulson indicated that the Bush administration is likely to leave it up to the administration of President-elect Barack Obama to decide how the second half of the $700 billion financial rescue fund should be spent.
Last month, Paulson said that the loans being extended to automakers General Motors Corp. and Chrysler LLC had effectively used up the first half of the fund and Congress should move to authorize the last $350 billion.
However, for that to occur, the administration would have to submit a report to Congress detailing how it planned to use that money.
He said the administration had discussions with the Obama team, but no decision had been reached to formally request the last $350 billion.
"The only decision-maker as to how that money is going to be used, how those funds are going to be used is going to be the Obama administration," Paulson said. "We've been quite clear with them that if they would like us to notify Congress on their behalf ... we're willing to work with them on it."
