The U.S. Treasury Secretary could make greater
progress toward a safer financial system by putting Fannie Mae
(FNM.N) and Freddie Mac (FRE.N) into federal receivership, the
Wall Street Journal said on Tuesday.
If the current law doesn’t give Henry Paulson that power,
he should seek it from Congress, the newspaper said in an
editorial on its website.
The Treasury Department and the Federal Reserve on Sunday
offered massive aid to bolster confidence in the companies and
head off a potential financial market meltdown.
Together, the country’s two biggest mortgage firms finance
about $5 trillion in U.S. home loans, or about half of the
total, so are too big to fail, the Wall Street Journal said.
“The question has been how to manage and regulate these
monsters in a way that minimizes risks to the larger financial
system and taxpayer,” the editorial said.
Paulson wants Congress to give the government more power to
rein in the two companies, including with a capital injection
of preferred stock if required.
“This is progress, but it’s not aggressive enough given the
risks. He could make more progress more rapidly toward a safer
financial system by putting the companies in federal
receivership,” the newspaper said.
Paulson could then appoint a prominent financial figure
with bipartisan credibility as a receivership czar, with a
mission to protect taxpayer interests.
A czar would have the power to replace the companies’
management and directors, as well as give priority to taxpayers
above the current private shareholders if the government does
inject capital, the newspaper said.
Receivership does not mean the companies will fold
overnight. They continue to hold trillions of dollars in
mortgage assets, and they would continue to buy and package
mortgages, the paper said.
But as a first priority, a receiver would be able to rein
in their portfolios of mortgage-backed securities — currently
about $1.5 trillion — that are a major source of their risk.
Later, as the mortgage crisis eases, the receiver could
decide whether to wind the companies down, sell them in parts
to the private sector, or let them continue in far more
restricted form, the paper said.
The receivership option would also help Paulson get out
ahead of the many other looming financial problems. Airline and
car companies’ failure may come in the future, the paper said.
Putting Fannie and Freddie in firmer hands now will
reassure investors that at least one risk is being well
managed, reducing public fear that the government is
overwhelmed, the paper said.
(Reporting by Pratish Narayanan in Bangalore; editing by
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