Wednesday, July 16, 2008

Paulson's Opening Remarks From Yesterday

Here is a link to the remarks

Fannie Mae and Freddie Mac, two of the government-sponsored enterprises (GSEs), are also working through this challenging period. Fannie and Freddie play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their role in the housing market is particularly important as we work through the current housing correction. The GSEs now touch 70 percent of new mortgages and represent the only functioning secondary mortgage market. The GSEs are central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction.


Translation: If the GSEs fail, we're hosed. Therefore, we need to do everything possible to keep these institutions afloat

In addition, debt and other securities issued by the GSEs are held by financial institutions around the world. Continued confidence in the GSEs is important to maintaining financial system and market stability.


Translation: This is probably the primary fact that got and kept Paulson's attention. As a former big guy at Goldman Sachs, he was involved in one way or another with Freddie and Fannie debt issues on many occasions. His experience is telling him how important these institutions are.

Our proposal was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac. OFHEO has reaffirmed that both GSEs remain adequately capitalized. At the same time, recent developments convinced policymakers and the 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.


Translation: This is a statement from the same guy who keeps saying the US has a strong dollar policy.

Here's the three point plan:

First, as a liquidity backstop, the plan includes an 18-month temporary increase in Treasury's existing authority to make credit available for the GSEs. Given the difficulty in determining the appropriate size of the credit line we are not proposing a particular dollar amount. Flexibility is the best means of increasing market confidence in the GSEs, and also the best means of minimizing taxpayer risk.


Translation: In a previous paragraph, Paulson said, "OFHEO has reaffirmed that both GSEs remain adequately capitalized." Now he states he is "not proposing a particular dollar amount" regarding the total loan value. These two statements do not jibe. My guess is the GSEs are in far more trouble than we thought. Why else would be need an unlimited amount of discretion for the total amount of the dollar injection?

Second, to ensure the GSEs have access to sufficient capital to continue to fulfill their mission, the plan gives Treasury an 18-month temporary authority to purchase – only if necessary – equity in either of the two GSEs.


Translation: The Treasury will now become a GSE shareholder. I wonder how other members of the financial community will feel about this? I bet Citigroup would love to have this kind of support for its stock price. How long do you think it will be before the market forces the Treasury to act on this promise?

Let me stress that there are no immediate plans to access either the proposed liquidity or the proposed capital backstop. If either of these authorities is used, it would be done so only at Treasury's discretion, under terms and conditions that protect the U.S. taxpayer and are agreed to by both Treasury and the GSE. I have for some time urged a broad range of financial institutions to raise capital and at Treasury we have constantly encouraged the GSEs to do just that. In March, at my request, both the Chairman and Ranking Member of this Committee hosted a meeting with me and the CEOs of the two GSEs where they agreed to raise capital and you began the effort to move your GSE reform bill, which is now hopefully about to be enacted with the modifications we are recommending today.


Translation: hold on -- monkeys are flying out of my butt.....give me a minute.....

Third, to help protect the financial system from future systemic risk, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by providing the Federal Reserve authority to access information and perform a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. Let me be clear, the Federal Reserve would not be the primary regulator. As I have said for some time, the Fed already plays the role of de-facto market stability regulator and we must give it the authorities to carry out that role. This role for the Federal Reserve with respect to the GSEs is consistent with the recommendation made in Treasury's Blueprint for a Modernized Financial Regulatory Structure. Clearly, given the scope of the GSEs' operations in world financial markets, a market stability regulator must have some line of sight into their operations.


Translation: Because we are lending the GSEs more and more money we will be looking over their shoulder more and more. That makes sense.

So -- here's what we have

1.) The Treasury can pump as much money as they want whenever they want into the GSEs. In the same breath we're told the GSEs are in good shape. Bullshit. The Treasury is asking for this loan ability because the GSEs are not in good shape and the Treasury is concerned that over the next 18 months we're gong to have additional problems.

2.) The Treasury is backstopping GSE stock. The treasury has the possibility of becoming the largest GDSE shareholder out there.

3.) The Treasury and Federal Reserve will perform more oversight.

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