And now to that conversation with Secretary of Treasury Henry Paulson. He sat down late yesterday with NPR's John Ydstie to explain the administration's decision to intervene.

JOHN YDSTIE: Mr. Secretary, welcome to Morning Edition.

Secretary HENRY PAULSON (Treasury Department): Great to be with you.

YDSTIE: I'd like to start by asking you this. Back in July when the Congress gave you the authority to do what you've done, you said you had no intention of using the power. What's changed?

Secretary PAULSON: Well, first of all, I said I had no plans to use the power. There has been a number of things that have changed. First, we got into Fannie and Freddie, and we learned that there was a capital deficiency that needed to be addressed. And number two, markets are increasingly jittery here and around the world, and investors are starting to more frequently ask the questions, how do we make a long-term equity investment in Fannie and Freddie Mac if we don't know what they're ultimately going to look like?

YDSTIE: How about for taxpayers? The Congressional Budget Office has said that this kind of a takeover could cost taxpayers $25 billion. Other analysts have said even more. Why put taxpayer money at risk here?

Secretary PAULSON: Well, our objective here is to prevent a serious risk to the financial system, which would hurt all taxpayers because our financial system is just critical to our overall economy. Anybody that wants, say, to have a car loan, a mortgage, any kind of credit, needs a strong financial system.

The other thing I'd like you to know is that we've structured this very carefully to protect the taxpayers. And to the extent the taxpayers are going to put preferred stock into this entity, it will be structured so that the first losses will be borne by the existing shareholders.

YDSTIE: What about those existing shareholders? Are they being wiped out or bailed out?

Secretary PAULSON: Well, I don't think they'd say they are being bailed out, that's for sure, because what has happened is the government support is coming above them, and they are going to take the first loss, and the taxpayers are going to be repaid before they get a penny.

But they're also, hopefully, not being wiped out. But this will take time. But if things work well and housing prices stabilize and over time our economy does better, the shareholders have the hope of having their share prices appreciate, and that is certainly true of the preferred shareholders also.

YDSTIE: What should the average American look for as a measure of whether this takeover is working?

Secretary PAULSON: I think the average American should look to the availability of mortgage finance. And hopefully if this works, over time you are going to continue to see an abundant supply of mortgage financing that is reasonably priced. And I think that will be one key indicator.

Another key indicator is over time, the economy will stabilize, and the financial institutions in the United States will do better, because it is our view that at the heart of the current economic challenge we have in the United States is a housing correction.

YDSTIE: How long will this government control continue, and what's the long-term plan for these companies? How do you ensure that this does not happen again?

Secretary PAULSON: Well, that is the major question; it's one I focused on. Because although the short-term objective is to stabilize and help us ride through this housing correction, these organizations had major structural flaws. And in the future, we are going to need to clarify whether there is clearly a government guarantee or whether there is no government guarantee. We are going to have to decide whether we want to have government support for a private profit, and we're going to have to decide how to deal with systemic risks.

And you ask, how long? I'm hoping it can be done in the next couple of years.

YDSTIE: Secretary of the Treasury Henry Paulson. Thank you very much.

Secretary PAULSON: Thank you.

(Soundbite of music)

MONTAGNE: Correspondent John Ydstie covers economics for NPR News, and he was speaking, of course, to Treasury Secretary Henry Paulson about the government takeover of Fannie Mae and Freddie Mac. You're listening to Morning Edition from NPR News.

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