Too Big to Fail [112]
At 6:00 p.m., cleanly shaven and now dressed in a blue suit, Paulson walked out onto the Treasury’s steps to a podium that had been hauled downstairs from the fourth floor and addressed the swarm of reporters who had assembled hastily.
“Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies,” Paulson said, reading a statement. “Their support for the housing market is particularly important as we work through the current housing correction.
“GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.
“To ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.”
Minutes after he finished, thunder rumbled in the distance. Soon the skies opened up.
Paulson could tell the hearing on Tuesday morning was going to be hostile the moment he took his seat to the right of Bernanke and Cox. His announcement on the Treasury steps had done little to shore up confidence. In fact, it seemed to be undermining it even further, creating confusion in the marketplace about what this new “authority” he was seeking really meant. Freddie ended down 8.3 percent, to $7.11, while Fannie lost 5 percent, falling to $9.73 on Monday. He knew he needed to start spinning fast, as much for Congress as for the markets.
“Our proposal,” he explained to the Senate Banking Committee, “was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac…. At the same time, recent developments convinced policy makers and GSEs that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary.”
As he was barraged with questions, Paulson emphasized the “temporary” nature of the authority he was seeking, hoping to win over the congressmen. “It is very intuitive,” he said, “that if you’ve got a squirt gun in your pocket, you may have to take it out. If you have got a bazooka, and people know you’ve got it, you may not have to take it out.”
Some panel members, however, were not buying that justification.
“When I picked up my newspaper yesterday, I thought I woke up in France,” said Senator Jim Bunning, the Kentucky Republican. “But no, it turned out it was socialism here in the United States of America. The Treasury secretary is now asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed purchase of Bear Stearns’ assets was amateur socialism compared to this…. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention into the private enterprise will be? More importantly, where does it all stop?”
Clearly frustrated by what he was hearing, Paulson struggled to articulate his defense. “I think our idea is that, that by having the government provide an unspecified backstop, the odds are very low that it will be used and the cost to the taxpayers will be minimized.”
“Do you think we can believe exactly what you’re saying, Secretary Paulson?” Bunning replied patronizingly.
“I believe everything I say and that I’ve been around markets for a long time—” Paulson began to reply before Bunning cut him off.
“Where is the money going to come from if you have to put it up?” Bunning asked.
“Well, obviously, it will come from the government, but I would say—”
“Who is the government?” Bunning asked indignantly.
“The taxpayer,” Paulson acknowledged.