MARGARET WARNER: In the wake of the government’s decision to seize control of the mortgage giants, there are questions over the impact of the plan and what lies ahead for the two companies.
The takeover plan engineered by Treasury Secretary Henry Paulson has several key elements. Among them, both companies were placed under conservatorship, and top executives were replaced. The government said it would inject money into Fannie Mae and Freddie Mac as needed, up to $100 billion per company.
The government also guaranteed the investments of holders of Fannie and Freddie debt, but gave common shareholders no protection against stock price losses. The government also pledged to buy $5 billion worth of mortgage securities backed by Fannie and Freddie. And, after 2010, the companies would be forced to reduce their portfolios by 10 percent a year.
For what all this may mean, I’m joined by two members of the Senate committee that oversees the mortgage and banking industries, Chris Dodd of Connecticut, chairman of the Senate Committee on Banking, Housing and Urban Affairs, and Richard Shelby of Alabama, the committee’s ranking Republican.
Welcome to you both, senators.
Assessing the Treasury's decision
MARGARET WARNER: Senator Dodd, beginning with you, did Henry Paulson do the right thing?
SEN. CHRISTOPHER DODD (D), Conn.: Well, we're going to have hearings next week on it.
My initial reaction is probably, under the circumstances, the right step to take, although I would like to know what -- why they didn't know this a month ago. When Senator Shelby and I and others included the authority the secretary sought to be able to extend lines of credit and take equity positions in both of these companies, why weren't we made aware then about the problems that have now surfaced a month later?
Now, I'm prepared to accept the fact that they just weren't aware of all of this, and the chief regulator, Mr. Lockhart, wasn't aware of it. But, certainly, that's a question we ought to raise, as to why we took the steps we did.
Now, let me quickly add, had we not taken the steps of granting the authority, I think this probably would have been a lot worse. In fact, Secretary Paulson has suggested as much. So, I'm very grateful to Senator Shelby and other members of the committee and the Senate, Senator [Harry] Reid, the majority leader, for seeing to it that we got that bill done.
Had we not accomplished that, then I think the power of the Treasury would have been severely limited, and wouldn't have been able to take the steps you just described.
MARGARET WARNER: Senator Shelby, do you agree with that, that this was a necessary step? And, if so, do you have any quarrels with any of the elements?
SEN. RICHARD SHELBY (R), Ala.: Well, I'm sure it was a necessary step.
The Fannie Mae and Freddie Mac situation was a debacle just waiting to happen. We knew for a number -- four or five years that they were thinly capitalized, questionable accounting practices, and, in a lot of instances, poorly run, although they did do some good things, as far as buying mortgages, securitizing mortgages from the housing industry.
But they're a hybrid, Margaret. They're -- they're a privately owned company with the implicit guarantee of the taxpayers. And that brought about a lot of risk with it. So, I tried and a lot of us tried, starting four or five years ago, tried to strengthen the regulator and bring up capital standards to where they would not go the way they have.
But we were unsuccessful to do that politically, and we're where we are today. I believe that the secretary of the treasury probably had very few, if any, options, other than what he did.
Taxpayer exposure and liability
MARGARET WARNER: So, [Senator] Dodd, the implicit backing of the government and the taxpayers, of course, has become explicit. How much do you think taxpayers are on the hook for here, potentially?
SEN. CHRISTOPHER DODD: Well, you described it, what the potential of liability is.
And, Secretary Paulson, if he were here, would quickly tell you that he anticipates that there will be no liability. The mere fact that they're providing this kind of backstop ought to be enough to provide the kind of stability and infusion of capital into these companies, these new constructed, if you will, architecture they have laid out, and so you won't have that kind of liability.
But, candidly, again Senator Shelby and I only a month ago were told we would never have to exercise the authority, that mere -- that merely having the authority would be enough. So, I'm skeptical about that.
There are basically three questions I'm raising with all of this. And that is, one, what happens to homeownership? I have no brief whatsoever for Fannie and Freddie, but there is a legitimate need, I think, for some structure here that provides the liquidity necessary to expand homeownership to as many hardworking families in this country as we have been able to do over the past number of decades.
Secondly, taxpayer exposure, which your question addresses, and, thirdly, of course, stability in the marketplace, and these are very critical issues. And we won't know the answer for some time. Remember, back in July, when we passed the legislation with this kind of authority I have described, the markets reacted very favorably initially.
And, then, as time went on, of course, they reacted negatively. While the markets have been good in the last two days on this matter, we need to have a little more time to determine whether or not this is going to work.
But let me lastly say to you this. It's very important -- you framed the question correctly, Margaret, at the outset. Putting aside whether you agree or disagree -- and I think Richard and I probably accept that what Mr. Paulson, Secretary Paulson, did here made some sense -- what are we going to do from here?
And it seems to me, we need to be thinking about whether or not we're going to create some new structure here that will allow for that liquidity to develop, so that we can have the kind of robust housing opportunity in this country that has been one of the greatest wealth creators for our nation in the last four or five decades.
MARGARET WARNER: And I want to continue with that.
But, first, let me just ask Sen. Shelby, do you share Senator Dodd's wariness, at least, about Treasury Secretary Paulson's new assurances that this now explicit guarantee, or promise to inject hundreds of billions of dollars into the companies, won't be needed, or are you a little nervous?
SEN. RICHARD SHELBY: Well, I'm skeptical. I'm skeptical. And I'm anxious about all of it.
I hope -- like Sen. Dodd said, I hope that we don't have to use the taxpayers' money here to prop these entities up, but I fear that we will before it's over with. But there's always a chance that we might not lose money, but I think you have got to put reality out there and say, there's a good chance.
MARGARET WARNER: Senator Shelby, staying with you for a minute, a couple of -- several Democratic senators have written to the regulator, Mr. Lockhart, raising questions at least about the severance packages that the CEOs of Fannie and Freddie at least seem to be entitled to. I think it's a combined $24 million. Do you think the regulators should rein that in?
SEN. RICHARD SHELBY: Absolutely.
I think that a lot of people, including a lot of former CEOs of Fannie and Freddie, have made millions and millions of dollars, and now there's the chance that the taxpayer might foot the bill at the end. I don't believe they should profit. Obviously, they didn't do such an outstanding job.
I know they had a board of directors. They're gone now. But the -- I hope that the regulator now will look at that very, very closely.
MARGARET WARNER: How do you feel about that, Senator Dodd, about the executive compensation?
SEN. CHRISTOPHER DODD: I don't disagree.
Look, there's a -- again, they're hybrid companies, dual missions of satisfying shareholders, and obviously a public mission as well. And, again, given the fact that there's -- there's a lot on the risk -- risk here for the public -- and, again, I think Dan Mudd and Mr. Syron did the best they could under certain circumstances.
And, as Hank Paulson has pointed out, this wasn't all of their doing. But, nonetheless, I think the idea that you walk away, at a time like this, and take an excessive amount of compensation -- I wish we could have done something, frankly, about some of these other private companies, where I look at these golden parachutes.
And I can't begin to tell you, Margaret, the reaction of my constituents when they hear about these multi-multi-million-dollar rewards that people get after failing with their companies. And while this doesn't rise to that level, certainly, the fact that it's $24 million, I think, is unwarranted.
SEN. RICHARD SHELBY: Margaret, if I could...
MARGARET WARNER: Yes.
SEN. RICHARD SHELBY: ... I think this is a worse situation, because no one wants excess compensation to anybody, whether it's private or public.
Now, this is a hybrid situation, publicly owned, publicly guaranteed -- privately owned, publicly guaranteed, the hybrid. I think the model itself is in question. We should be very careful in the future creating and sustaining a GSE, where there's risk for the taxpayer.
The role of Congress
MARGARET WARNER: So, let me end with the sort of at least broad philosophical question to you both, beginning with you, Senator Dodd.
Do you think this function that you described that Fannie and Freddie did, which was essentially to provide liquidity in the housing market by buying up mortgages from banks, and, of course, repackaging and selling them, but, in the meantime, the banks could continue to lend, or the mortgage brokers could continue to write mortgages, do you think you need either a government entity to do that or a quasi-government entity, a hybrid, or can the private markets really handle the job themselves?
SEN. CHRISTOPHER DODD: Well, again, we don't have the time this evening, Margaret, but this didn't all happen miraculously.
The fact that there was such no cops on the beat, predatory lending, subprime, all this went on over the last eight or 10 years. In a sense, Fannie and Freddie are almost victims of what happened, to some degree here.
Ultimately, I think we're going to need something. And, again, I carry no brief for these two GSEs, but I think we need to look in the 21st century of how we can create that kind of liquidity.
If the private sector can do it, I'm willing to hear that argument. I'm suspicious about whether or not that can happen, as well as it's happened with some entity. Some have been talking about creating a public utility model, in a sense, that would allow capital to be raised, have a regulatory environment much stronger than the one we have seen, would not be the hybrid that Dick -- Richard talks about, but some idea like that.
The absence of anything out there worries me. Again, I emphasize to you, our economy has been strong for a number reasons. One of the major reasons is a vibrant housing market. If you lose that, not only do we cause great suffering for people who want to buy a home or sell a home, but, also, our economy at large could pay an awful price. So, I'm anxious to hear about some alternative ideas.
MARGARET WARNER: And, Senator Shelby, what's your view on that, whether the private markets could and would do what Fannie and Freddie did, including making mortgage money available to lower-income people?
SEN. RICHARD SHELBY: I think the private market can do it. Will they do it? We're not sure. But I think that we should not go down the road again to have the risk of the taxpayers on any of this.
MARGARET WARNER: And let me ask you a brief final question, Senator Dodd, and then Senator Shelby.
In hindsight, did Congress drop the ball here? Was there a way that congressional action two or three years ago -- you have been having this debate for years -- could have forestalled this?
SEN. CHRISTOPHER DODD: Well, in 2005, the House Republicans passed a bill that Democrats offered on this side, and the White House threatened to veto it. And that's where it died.
The debate over reforming the GSEs was never the issue. There were those who wanted to get rid of them altogether. And, again, I remind the audience we never would have had a fixed rate 30-year mortgage that made housing available to almost 70 percent of the adult population of this country -- and, frankly, over the last year-and-a-half, as bad as this housing market has been, in the absence of Fannie and Freddie, it would have been 20 times worse had they not been around to provide liquidity.
So, be careful what you wish for here. And, in that sense, I think Congress, we did the right thing, Sen. Shelby and I did, this past summer. And, again, I emphasize, the White House threatened to veto that legislation.
MARGARET WARNER: Let me get to Sen. Shelby.
SEN. RICHARD SHELBY: Margaret...
MARGARET WARNER: Yes.
SEN. RICHARD SHELBY: ... just several years back, I was chairman of the Banking Committee.
A lot of us on the Republican side of the aisle tried to bring forth a strong regulator that would -- would have brought capital to these GSEs. And our friends on the other side of the aisle killed that bill on the Senate floor. They would not let us move forward.
Would that have saved the GSEs? We don't know now, but it would certainly have mitigated it.
MARGARET WARNER: Sen. Richard Shelby, Sen. Christopher Dodd, thank you both.
SEN. CHRISTOPHER DODD: Thank you, Margaret.
SEN. RICHARD SHELBY: Thank you.