Excerpts from Treasury Secretary Paulson’s Statement (Published: July 13 2008, 6 PM) About Fannie and Freddie with inserts of Cumberland’s Observations.
Treasury Secretary Paulson. “In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.”
Cumberland comment: Everybody has bought into this plan (politically) whether they want to or not. This is no longer about “if” but about “how soon” and “how much.”
Paulson: “First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.”
Cumberland comment: Paulson wants a full discretion as to “how much.” He must have Congressional approval to increase this line of credit. He may get it but he may also get a limit as to the amount and as to the timing. Congress would be more protective of the federal taxpayer if it puts a cap on this line of credit rather than vest discretion without limits. And Congress would better protect the taxpayer by oversight. Remember that it was the Congress and the government agencies that got us deeply into this mess. What makes anyone believe they can be trusted with full discretion and without any limitations?
Paulson: “Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.”
Cumberland: Okay, taxpayer, you are about to become a shareholder in F&F with your voting rights in the hands of the Bush Administration. Are you ready for that one? There are many ways the government can honor the “implied” guarantee of the federal government on F&F debt. No where is the shareholder granted an implied bailout. Treasury does not need to buy equity. It does not need to dilute existing shareholders. Under current market conditions, if it does not dilute them, it gives the existing shareholders a subsidy from the rest of the taxpayers who will have to pay it. An alternative is for Treasury to buy subordinated debt or preferred stock (convertible or non-convertible). Congress can modify this one quickly and place the taxpayer in a more senior position to the existing shareholders. We expect a policy fight over this one.
Paulson: “Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. “