Link shortened by wisconsin_cur$this->bbcode_second_pass_quote('', ' ')WASHINGTON (Dow Jones) - Outgoing Treasury Secretary Henry Paulson on Wednesday outlined four long term options for Fannie Mae and Freddie Mac: nationalization, privatization and two hybrid approaches.
"The first step must be for policymakers to decide - in light of the recent housing bubble and the severe financial and economic penalty it has imposed on our nation - the role government should play in supporting home ownership," Paulson told observers at the Economics Club in Washington.
Paulson is on his way out as Treasury Secretary with President Elect Barack Obama's nominee to succeed Paulson, New York Federal Reserve Chairman Timothy Geithner, ready to step in his place.
The Treasury placed both Fannie (FNM) and Freddie (FRE) in a conservatorship in September, which Paulson said must be a temporary condition. He argued that outright nationalization, his first option, is a "less than optimal" approach.
Paulson also said he was skeptical of fully privatizing the housing entities, which was another strategy he discussed. With this approach, Fannie Mae and Freddie Mac would be broken up into a number of entities which would "minimize risk."
One hybrid approach would be to create a Ginnie Mae type entity for non- Federal Housing Authority mortgages. This structure would provide only a partial guarantee for mortgage backed securities.
"While such a hybrid program would clearly define the extent of the government's guarantee, developing risk sharing parameters compatible with profit incentives would be as problematic, and potentially as inefficient, as in the current GSE structure," Paulson said.
He was most supportive of an approach that would establish a mortgage credit guarantor. In this strategy, Congress would replace Fannie Mae and Freddie Mac with private entities that would purchase and securitize mortgages guaranteed by the federal government. These entities would be regulated by a rate setting commission that would also approve mortgage products. "In this model, continued safety and soundness regulation would be essential," Paulson said.
Separately, the Federal Reserve Bank of New York is expected on Thursday to release its first study reporting an aggregate amount of Fannie Mae, Freddie Mac and Ginnie Mae guaranteed mortgage-backed securities the division has purchased as part of an earlier announced $500 billion program. The program was announced on Nov. 25 to create liquidity in the mortgage-backed securities market and help lower mortgage rates in response to the housing crisis. The New York regulator will on a weekly basis provide details about the aggregate dollar figure spent on mortgage backed securities. No details will be provided about which financial institutions are participating. "[This has] accomplished a vitally important step in addressing this housing correction - lower mortgage rates that may bring additional credit-worthy buyers into the housing market," Paulson said.
Paulson argued that the program has already had a significant impact, pointing out that the 30-year fixed mortgage rate has fallen to 6.04% the week before the plan was announced, to 5.1% last week.
A New York Fed spokesman said Wednesday that the division is making one-on-one purchases, rather than auctions as some expected.
Ok, I know silly idea, but for the sake of argument suppose I was foolish enough to have money invested in one of these companies. I would be thinking, ohh...the company just issued billions of dollars in new stock which is going to dilute my stock. Not only that, it's going to be senior to my stock, so in a bankruptcy, I'm more likely to get nothing. AND the government just limited my dividend. I'm thinking, I'm pissed, and I want out of this stock. Somehow the market has different logic though. The companies that are pegged as being the ones to dilute their stock....they all soared today. They were some of the biggest gainers. Can someone explain that to me? I don't get it.
