by Frank James
Treasury Secretary Henry Paulson is talking to anyone who will listen to explain why the Bush Administration felt it necessary to takeover mortgage giants Fannie Mae and Freddie Mac.
His message: it was the only thing to do. If the two had been allowed to fail, the mortgage markets and lending markets beyond would have completely seized up. The financial markets might have imploded too with dire consequences too frightful to contemplate.
Here's a transcript from his interview on CBS's Early Show this morning:
HARRY SMITH, co-host:
Joining us from the White House is Treasury Secretary Henry Paulson.
Mr. Treasury Secretary, thanks for joining us. Good morning.
Mr. HENRY PAULSON (Treasury Secretary): Good morning, Harry.
SMITH: Why do you feel so compelled to do this and in the end, could this
cost several hundred billion dollars?
Mr. PAULSON: Harry, these companies are so big and so interwoven into the
financial markets and our financial system, we had no choice. This--a failure
by either one of these companies would cause great havoc in the economic
system. It would be a big blow to the average American. Affect their
budget...
SMITH: Hm.
Mr. PAULSON: ...their ability to get a consumer loan, a car loan. And the
thing I can say to you, Harry, as we've structured this facility to protect
the tax payer, the government will be repaid and any money we put in before
the shareholders of these companies get a penny.
SMITH: People should know, though, if they have one of these mortgages--one
of these mortgages, that this has no effect on their mortgage, whatsoever.
Mr. PAULSON: Well...
SMITH: All this does is basically save the company. Correct?
Mr. PAULSON: Harry, even more than that, yes. If you're going to need to
get a new mortgage, hopefully this will increase the availability and reduce
the cost of mortgage financing going forward. The housing correction is at
the heart of what we're going through right now in our economy. It's at the
heart of the problem. Until we get this behind us, we're going to continue to
have turmoil in our financial system. So one of the key objectives here is
to--is to run these companies to stabilize the mortgage market and to make it
easier for Americans to get mortgage financing going forward.
SMITH: Mr. Secretary, where do you think the bottom is on this market?
Mr. PAULSON: Harry, I don't make market predictions, but one thing I do know
that the key here is getting the bulk of that housing correction behind us and
only when that happens will we be at the bottom and the key there, I think, is
to make sure that we have available mortgage financing.
SMITH: Hm.
Mr. PAULSON: Because only if there's mortgage financing is there a
chance--will these housing prices stabilize.
SMITH: Right. Real quickly, was this a bad business model in the first
place? And do you foresee more bail outs in the future?
Mr. PAULSON: Well, this was a flawed business model in the first place.
Never should've happened. Great ambiguities, a big conflict between public
purpose and private profit, systemic risk. And one of the things that
is--need to be done and I think this move sets the country up to correct this
problem longer term.
SMITH: All right.
Mr. PAULSON: And it's going to need to be corrected.
SMITH: And very quickly, do you foresee more government bail outs in the next
say month or so?
Mr. PAULSON: Listen, first of all, Harry, I'm not going to make any forecast
and remember, in this situation, the tax payer's protected, shareholders
aren't being protected here.
SMITH: Hm. Sure.
Mr. PAULSON: The government's coming ahead of the shareholders.
SMITH: All right. Mr. Secretary, we thank you so much for your time this
morning. Do appreciate it, sir.
Mr. PAULSON: Thank you, Harry.
SMITH: Right.
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