Treasury Secretary Henry M. Paulson, Jr. urged Congress to finish legislation that would create a regulator for government-sponsored enterprises, Fannie Mae and Freddie Mac, and financially shore up the two mortgage financing giants.

 

In a speech Tuesday in New York, Paulson called on Congress to approve the Bush Administration's plan that would allow the Department of Treasury to buy obligations and securities of the institutions that deal with housing finance.

 

"Congress is very near completing its work to create that regulator, and it must do so quickly," Paulson said. "Investors in our nation and around the world need to know that we understand how important these institutions are to our capital markets broadly, and to the U.S. economy."

 

Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Corporation) are the biggest sources of mortgage finance in the U.S., Paulson pointed out in his prepared remarks at the New York City Public Library's main branch. "Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions," he said.

 

"The sooner we work through the housing correction, the sooner home prices will stabilize, and uncertainty about the values of mortgage-related assets will be more easily determined. So now, more than ever, we need Fannie and Freddie out there, financing mortgages."

 

Recently, the Administration proposed that Congress give the Treasury Department temporary authority for 18 months to provide a liquidity backstop and a capital backstop to the Fannie Mae and Freddie Mac.

Although, neither institution is planning to access either backstop, Paulson said, if the need comes up, the money would only be provided "under terms and conditions that protect the U.S. taxpayer and are agreed to by both Treasury and the" institutions, he said.

 

However, the Congressional Budget Office estimates that the value of enacting this proposal could be as high as $25 billion over fiscal years 2009 and 2010. At the same time, the CBO stated in a July 22 letter to Congress: "If the proposal is enacted, private markets might be sufficiently reassured to provide the government-sponsored entities with adequate capital to continue operations without any infusion of funds from the Treasury."

 

Despite current upheavals in the capital markets Paulson said the national economy is solid fundamentally but working through the problems could take some time.

Concerning the recent failure of IndyMac Bancorp, he said that the bank's assets represented only 0.2% of total banking assets in the U.S. In addition, no insured deposits have or will be lost, he said.

 

Paulson also indicated his support for fair-value accounting techniques amid questions of proposed rule changes.

 

In response to questions from attendees, Paulson indicated support for more transparency in accounting methods. Recently, the Institute for International Finance, an international bank lobby, said it would revise fair-value accounting rules. "I believe in fair value accounting," said Paulson. "It is hard to run a financial services firm if you don't have the ability to mark securities to market."

 

Although some market participants might partially blame the current accounting rules for the dreary state of the market, they are looking for more transparency, said Paulson. "The market is looking for more transparency now and that's the right focus," he said.

 

 

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.