Bill Failed To Boost Confidence In Fannie, Freddie

Jeffrey Birnbaum, a managing editor at The Washington Times talks about how Fannie Mae and Freddie Mac got to this point.

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JACKI LYDEN, host:

For more on how the mortgage giants, Fannie Mae and Freddie Mac, got to this point, and where they're likely to go next, we turn to Jeffrey Birnbaum. He's the managing editor at the Washington Times. Thanks for joining us.

Mr. JEFFREY BIRNBAUM (Managing Editor, Washington Times): Thanks for having me.

LYDEN: Earlier this summer, Congress passed a legislation designed to boost confidence in Fannie and Freddie. How do we get from that legislation to this weekend's reports of a government takeover?

Mr. BIRNBAUM: Well, the legislation was not actually a bailout, as it was sometimes referred to. It was actually more of a backstop, an authority for the Treasury Department to step in if Fannie Mae and Freddie Mac failed to do what they're supposed to do, which is to borrow a whole bunch of money in order to back the issuance of mortgages around the country.

And in the last few weeks, Freddie Mac, in particular, the smaller of the two companies, was having extra trouble raising that money because of lack of confidence by investors. And the Treasury Department apparently is worried that they might not be able to borrow a whole lot more. And they're now considering using that authority, that backstop authority, to inject cash into Fannie Mae or Freddie Mac or both.

LYDEN: You've been talking to people in both the private and public sectors. How sure are they that the government can run Fannie and Freddie better than those companies' CEOs did?

Mr. BIRNBAUM: Well, there's a big debate on that subject. The companies have long argued that the government is not adequately staffed to manage the securitization of billions of dollars of mortgages. That is, making a market, a secondary market, in mortgages of the kind that we're now accustomed to.

In fact, because of Fannie Mae and Freddie Mac, we have 30-year fixed-rate mortgages - something the rest of the world doesn't. And these companies have really perfected the ability to find enough money to underwrite mortgages of this kind. The government really hasn't done that, and so the rescue plan that's being considered might fall short of an absolute takeover of the two companies because a lot of the expertise in securitizing those mortgages rests within those companies and not within the federal bureaucracy.

LYDEN: Jeffrey Birnbaum, you've reported a lot on the close relationship between Congress and the lobbyists in Fannie and Freddie. This deal must fundamentally change that relationship.

Mr. BIRNBAUM: Well, yes. I think that the lobbying of Fannie and Freddie, which once was legion, they were known as real powerhouses on Capitol Hill, has declined significantly as the fortunes of the two companies have also declined. But it is, I think, fair to say that this day of reckoning, if it in fact is coming, has been delayed because of the amount of pressure the two companies have put on Congress to keep hands off over the years.

And there will be a debate, I'm sure, whether too much pressure was applied and the public interest was put in jeopardy because of that pressure.

LYDEN: So, if the government intervention goes through, how can we tell whether it's working?

Mr. BIRNBAUM: Well, the markets will tell us whether the government action is working. We'll see whether investors will lend enough money and at reasonable rates to Fannie Mae and Freddie Mac. We'll see if investors buy the company stock and whether the stock price goes up or down.

In any case, it's pretty clear that the government intends to do whatever it needs to do to make sure the mortgage markets operate because that's such a fundamentally important part of the financial markets around the world.

LYDEN: Jeffrey Birnbaum is a managing editor at the Washington Times. Thanks very much for talking with us.

Mr. BIRNBAUM: Thank you.

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Government To Bail Out Mortgage Giants

Earlier this summer, Congress gave the Treasury Department the authority to inject capital into Fannie Mae and Freddie Mac, and stand behind their debt. At the time, Treasury Secretary Henry Paulson said he had no plans to use the powers. The hope was that the financial markets would gain confidence in the companies, and the housing and mortgage markets would stabilize.

They haven't, and according to a number of reports published on Saturday, it now appears the government is poised to take control of the mortgage giants.

Charles Calomiris, professor of financial institutions at Columbia University, says it's the right move to make at this point.

"The intent is to keep these things operating," he says. "That is, to keep the mortgage flow continuing, and that's essential because Fannie Mae and Freddie Mac have constituted such a huge share of that mortgage flow; and with the credit crunch in the private banking sector, it's all the more important."

According to news reports, Daniel Mudd, the chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, were summoned separately to the offices of their new regulator, the Federal Housing Finance Agency, on Friday. There, chief regulator James Lockhart, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Paulson informed them of the plan, which represents a sweeping government intervention in the financial markets.

According to the reports, they were told, among other things, that they would be dismissed, and that the government would take over operation of the companies. In addition, the government would inject capital as needed to offset losses on bad mortgages the companies hold or guarantee.

According to the reports, investors who own common stock in the companies could be virtually wiped out, or at least see their stock value diluted, but holders of preferred shares and company debt may be protected. It's possible all of this could cost U.S. taxpayers tens of billions of dollars, or more.

Calomiris argues it's worth the risk.

"I'm pretty optimistic about the taxpayer exposure. I don't think it's gonna be that large," he says. "Of course, even if it were tens of billions of dollars, the cost in terms of the overall condition of the economy that would result from not intervening would be much greater."

An unveiling of the plan could come as early as this weekend, but the Treasury has declined to comment on the reports.

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