TOPICS > Economy

Treasury Official Explains Fed’s Move to Rescue Housing Firms

September 8, 2008 at 6:10 PM EDT
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After a recap of the weekend's news on the government takeover of housing giants Fannie Mae and Freddie Mac, acting Treasury Undersecretary Andrew Ryan details the move.

KWAME HOLMAN: The Treasury Department’s decision yesterday to take over the mortgage giants came after both companies faced serious problems securing enough money from private sources to purchase new mortgages.

Treasury Secretary Henry Paulson announced the dramatic move.

HENRY PAULSON, U.S. Treasury Secretary: A failure of either of them would cause great turmoil in the financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth, from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans, and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.

KWAME HOLMAN: Fannie Mae and Freddie Mac are by far the largest providers of U.S. home loan financing, owning or guaranteeing some $5 trillion in loans, about half the outstanding mortgages in the United States.

The companies were created by the government decades ago to help more Americans afford the cost of buying a home. The pair are unusual entities, private companies that are traded on the stock market, but operate as government-sponsored enterprises, or GSEs.

But, as mortgage defaults have continued to rise, Fannie and Freddie have racked up about $12 billion in losses.

HENRY PAULSON: Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.

KWAME HOLMAN: Under the plan, both companies have been placed in a conservatorship to be restructured, similar to a bankruptcy process. Top officers were replaced, and overall control was given to a federal regulator. And the government can provide money as needed, up to $200 billion total, for the two companies.

The government also would guarantee the investments of bondholders, who hold huge amounts of debt issued by Fannie and Freddie. Those bondholders include pension funds, mutual funds and central banks overseas.

But shareholders of Fannie and Freddie stock would not be protected. Eighty percent of the companies would now be owned by the government. A shareholder’s stake would be reduced to just 20 percent of the value of either company. Fannie and Freddie would be forced to reduce their portfolios by 10 percent a year, beginning in 2010.

SEN. RICHARD SHELBY (R), Alabama: What’s the trigger? At what point, in other words?

KWAME HOLMAN: Paulson received congressional approval in July to use taxpayer funds to finance an intervention, but expected at the time that having the authority to do so would be sufficient.

HENRY PAULSON: There are no plans to access either of these temporary backstops. If accessing them becomes necessary, we would do so only under terms and conditions that protect the U.S. taxpayer.

KWAME HOLMAN: Stock prices around the globe rallied today on news of the takeover. The move also was supported on the presidential campaign trail. Both Democrat Barack Obama and Republican John McCain said the bailout was necessary, but said they had some concerns.

SEN. JOHN MCCAIN (R-AZ), Presidential Nominee: Today, we’re looking at costly government-led restructuring of our home loan agencies. We need to keep people in their homes, but we can’t allow this to turn into a bailout of Wall Street speculators and irresponsible executives.

SEN. BARACK OBAMA (D-IL), Presidential Nominee: So much of this housing crisis could have been prevented if the feds had done their job regulating many of these agencies. Now, not only are people losing their homes, but taxpayers are also going to be potentially on the hook for some of the bill.

KWAME HOLMAN: The treasury secretary said he expects the takeover to provide stability for now, but Congress and the next president will have to act on the long-term future of Fannie Mae and Freddie Mac.

Conditions behind the plan

Anthony Ryan
Acting Treasury Undersecretary
[W]e have seen how market has deteriorated. We have seen them have greater challenges, in terms of accessing the capital markets. We have also seen the impact it's had on every American.

JUDY WOODRUFF: And for a closer look at the plan and the government's rationale, we're joined by acting Treasury Undersecretary Anthony Ryan.

Secretary Ryan, thank you for being here.

ÂANTHONY RYAN, Acting U.S. Treasury Undersecretary: My pleasure.

JUDY WOODRUFF: Now, we just heard Secretary Paulson just a little while this summer that there were no plans to -- to do this. What changed?

ANTHONY RYAN: Well, the conditions did deteriorate in July and August.

And these companies have faced these challenges. And, as the secretary said yesterday, our focus has been on ensuring actions are taken to help facilitate market stability. And the secretary also talked about the important role they play, not just in the mortgage market, but our capital market.

JUDY WOODRUFF: You know, the reports were that, if this hadn't been done, the companies were facing collapse. And, at the same time the American public was being told they were capitalized, that they had something like scores of billions of dollars in capital on hand. So, some people don't make the connection.

ANTHONY RYAN: Well, I think you need to appreciate the exposures that they have. And it's literally in the trillions of dollars.

So, while billions is certainly a big number, relative to the amount of exposure that they had, in terms of their liabilities and the guarantees on mortgage-backed securities, and the scale of that, and the distribution of that, not just here in the United States, but around the world, these institutions are very, very large. And it's very important that they are in a position where they continue to function, given their relationships to other aspects and other financial institutions.

JUDY WOODRUFF: Why the need to do this right now?

ANTHONY RYAN: Well, we have seen how market has deteriorated. We have seen them have greater challenges, in terms of accessing the capital markets. We have also seen the impact it's had on every American, either directly, in terms of rising mortgage rates -- and we know we're dealing with this housing correction in our economy, but we also must recognize that our capital markets are interconnected.

So, this strain is mortgage rates is not constrained just to mortgage rates. We have seen that impact in terms of other types of loans, student loans, car loans, credit cards. And we need to make sure that our capital markets can continue to work for our citizens.

JUDY WOODRUFF: Who is to blame for this?

ANTHONY RYAN: Well, we're not in a finger-pointing mode right now. We're in the mode of doing everything we can to facilitate our capital markets.

We're looking forward to facilitating additional mortgage availability. I think everybody can be part of the solution, in terms of improving practices on mortgage underwriting and investor discipline. And that's something we want to continue to focus on, not just as it relates to these two enterprises, but across the broader markets more broadly.

Details of the deal

Anthony Ryan
Acting Treasury Undersecretary
This summer, legislation was moved to the president, created a new independent regulator, the FHFA. The new regulator has more authorities and more ability to impact the regulation of these enterprises.

JUDY WOODRUFF: Well, what about the charges that are broadly out there, that there was a lack of oversight, a lack of regulatory control over these companies that played a huge role in all of this?

ANTHONY RYAN: Well, we have seen some important changes.

This summer, legislation was moved to the president, created a new independent regulator, the FHFA. The new regulator has more authorities and more ability to impact the regulation of these enterprises.

And I think this will be a constructive development. And, in addition to that, the marketplace and market practices have to be part of the solution. I think, collectively, we will be in a better position, that, ultimately, our markets and our citizens will be well afforded.

JUDY WOODRUFF: Were Fannie Mae and Freddie Mac leveling with everybody about just the true shape that they were in financially?

ANTHONY RYAN: Well, I think they have to file as public companies, in terms of reports with the Securities and Exchange Commission. That information is in the marketplace.

You have a lot of the different investors looking at these issues. But I think it also illustrates the -- the scale of these operations. And some of the covenants that we put in place with the agreements that the treasury entered into on Sunday will help reduce some of the risks associated with some of their operations.

JUDY WOODRUFF: I ask because there were the reports about these outside investment -- the investment banking teams came in, looked over the books, and said they didn't have nearly as much capital on hand as they had indicated they did.

ANTHONY RYAN: Well, we worked with a lot of different advisers as part of that information-gathering and assessments, so that we could advise the secretary relative to the new authorities that Congress gave him just a few months ago.

And, as part of that work, we looked at market information. And that was very helpful, in terms of helping us structure something that addressed all of the various objectives that we had, not just in terms of market availability, but also mortgage availability and protections for the taxpayers.

JUDY WOODRUFF: Why did Treasury decide, Secretary Ryan, to essentially bail out the bondholders, people who hold the debt in Fannie Mae, but not the shareholders?

ANTHONY RYAN: Well, it's important to recognize that the -- we want these enterprises to continue to be in a position to finance their operations and continue to provide mortgage credit to our marketplace.

The debt holders help facilitate that. And we also wanted market stability. And there are literally trillions of debt exposures, as well as the guarantees that these mortgage enterprises have been engaged in. So, that was a very -- part of market stability.

But, importantly, while we looked at the shareholders -- and, obviously, they have taken on very real losses over the last year, with their stocks down significantly -- it's important to recognize that we don't want to put the shareholders' interests in front of the taxpayers' interests. And, so, that was part of our term and conditions, to ensure that the taxpayer's interests were being protected.

JUDY WOODRUFF: But the bondholders are being helped here.

ANTHONY RYAN: Yes, the bondholders are being helped, as part of our market stability, but we're also getting considerations for that as well. And there are terms and conditions in the agreement.

JUDY WOODRUFF: What do you mean considerations?

ANTHONY RYAN: Well, we're receiving a senior preferred position in these enterprises. This is one of the agreements that we entered into yesterday.

And, in addition to that, we will also receive warrants, so that we can have up to 80 percent of the companies going forward, so that the taxpayer is being compensated for providing that commitment to these enterprises, which supports the debt holders and the holders of the guaranteed mortgage-backed securities.

Associated costs?

Anthony Ryan
Acting Treasury Undersecretary
And we will do everything we can to make sure that they're operating well and that the taxpayer is being protected on a lot of different scenarios.

JUDY WOODRUFF: Well, speaking of the taxpayers, I read analysis to say that there will probably be among the most expensive rescues ever financed by the taxpayers in this country, saying it could end up in the tens of billions of dollars.

ANTHONY RYAN: Well, these are important commitments that we are making. We have a lot of protections for the taxpayers.

That being said, we very much need to see our capital markets continue to function. And we looked at this, and felt this was the optimal position and decision to be making at this point in time.

JUDY WOODRUFF: So, how much are we talking, in terms of cost to the taxpayers?

ANTHONY RYAN: Well, I think that will be determined in the months ahead and in the years ahead, in terms of how these enterprises work, how these losses play through their position.

And we will do everything we can to make sure that they're operating well and that the taxpayer is being protected on a lot of different scenarios, whether it's with this agreement or some of the other activities that the secretary outlined yesterday.

JUDY WOODRUFF: But don't -- but don't taxpayers deserve to know now how much this is going to cost?

ANTHONY RYAN: Well, I think it's a function of, they have to know that we took their interests in mind and were very hard about putting in agreements to protect those taxpayers' interests.

The ultimate return or loss will be determined as a function of how the markets evolve, how our economy evolves, and what the actual results of these enterprises will be.

JUDY WOODRUFF: This essentially makes the federal government the nation's largest provider of home mortgages.

And I guess my question is, isn't that an odd position for the government to be in, when we live in a capital-driven economy?

ANTHONY RYAN: Well, I think you put your finger right on a very important issue, which led to many of the challenges that we have addressed over the weekend.

What this period does is, it give the opportunities for the markets to be stable, for the enterprises to continue to operate and provide capital, but, importantly, it gives an opportunity, in the sense, for a time-out, to engage on that very important issue and ask some of those fundamental questions.

These are an odd construct, where we have a public mission, in terms of housing, and we also have shareholders who are looking for their returns to be maximized. And those objectives can be conflicting. And that led to many of the challenges that we're addressing today.

JUDY WOODRUFF: So, are you saying, down the road, Fannie and Freddie get back on their feet, or what?

ANTHONY RYAN: Well, I think, down the road, there certainly needs to be a discussion and a debate about the ultimate form and the ultimate structure of how the government wants to deal with housing.

And I expect that to occur in the next administration and with the next Congress, to ask these fundamental issues. But, in the meantime, we have taken actions to help facilitate stability in the markets. And these enterprises can continue to deploy capital to our citizens, in terms of mortgage credit, which is so important for us to work through the current challenges in our economy today.

JUDY WOODRUFF: But you're saying those are questions that, for this administration, you didn't feel you had the ability to answer that, or...

ANTHONY RYAN: I think we will share thoughts and views on that in the months ahead. And the secretary mentioned this yesterday.

But I think our first order of focus is, make sure we have stability in our capital markets. So, we're very focused on that at the moment.

JUDY WOODRUFF: Acting Undersecretary of the Treasury Anthony Ryan, it's good to have you with us.

ANTHONY RYAN: Thank you very much.

JUDY WOODRUFF: Thanks very much.