Jul 22, 2008 6:35 pm US/Central
Fannie, Freddie Rescue Could Cost $25 Billion
Treasury Secretary Paulson: Congress Should Move Fast To Shore Them Up
WASHINGTON (CBS News) ―
Congress' top budget analyst says a federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion.
But Peter R. Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers Tuesday that there's a better than 50 percent chance the government will not have to step in to prop up the companies by lending them money or buying stock.
Congress is expected to vote this week on a housing measure that includes Treasury Department authority to throw Fannie and Freddie a temporary lifeline.
Treasury Secretary Henry M. Paulson, who has been pressing for the power, says the backup plan will help calm investors and stabilize financial markets.
Paulson said Tuesday that the continued operations of Fannie and Freddie - which guarantee or own almost half of the home mortgages in the country - would be "central to the speed with which we emerge from this housing correction."
Paulson made his comments in a speech in New York in which he again sought to reassure Americans that despite the recent turmoil, the nation's banking system is fundamentally sound.
Treasury officials confirmed that bank examiners from both the Federal Reserve and the Office of the Comptroller are currently inspecting the books at both Fannie Mae and Freddie Mac. Paulson said in an interview published Tuesday in The New York Times that he believed the results of those examinations would provide an important signal of confidence for the markets.
After a period of market turbulence in which fears grew about the fiscal soundness of both institutions, the administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and also to purchase stock in the two companies if needed. Paulson has stressed that the proposal is a backup effort that would be in effect for 18 months as a way to calm investor fears.
The administration and leaders in both the House and Senate have been in negotiations over the plan. Paulson predicted in his speech that Congress would "act to complete work on this legislation this week." The House is expected to vote on the support plan, which also includes a foreclosure rescue for 400,000 strapped homeowners, on either Wednesday or Thursday.
Democrats and Republicans queasy about a federal rescue of the mortgage giants are coalescing around the idea of letting the government slap limits on the multimillion-dollar pay packages of their executives.
Key lawmakers - puzzling over how to explain to constituents why they voted to bail out the troubled government-sponsored firms - see new curbs on compensation for the top officers as a crucial measure to cut down on the cringe factor.
At a time when Fannie Mae's and Freddie Mac's troubles have investors worried and the government ready to jump in with untold sums of cash, the lavish pay of the two companies' executives is increasingly difficult to defend, they say.
Sen. Bob Casey, D-Pa., says Fannie and Freddie "have had their hard-won credibility undermined in recent weeks," on the heels of major accounting scandals at the firms in 2003 and 2004.
"While the subprime mortgage crisis is hardly the fault of these companies, past practices of awarding huge bonuses and higher executive salaries calls into question the prudence of extending an unlimited credit line of taxpayer money to the companies whose management practices have been questionable over recent years," Casey said in a letter to Treasury Secretary Henry M. Paulson.
Casey called for capping the companies' executive pay "at reasonable levels" if they used the line of credit or need Treasury to step in and buy their stock. Casey also said their boards should sue to recover recent bonuses.
Last year, Freddie Mac paid Chairman and Chief Executive Richard Syron nearly $19.8 million in compensation even though the mortgage company's stock lost half its value. During the same period, Fannie Mae President and Chief Executive Daniel Mudd got compensation valued by the company at $12.2 million, including a $2.2 million bonus.
"I would like to know why taxpayers should extend Fannie and Freddie an unlimited line of credit at a time when their stock and investor confidence has fallen precipitously and their CEOs continue to make multimillion-dollar salaries and bonuses," Sen. Chuck Hagel, R-Neb., told Paulson in a letter last week.
Critics of Fannie Mae and Freddie Mac, including Republicans who question the very existence of government-sponsored mortgage companies, have long denounced the firms for richly compensating shareholders and executives in good times while relying on taxpayers and the government to prop them up should they falter.
With the request for a federal lifeline, though, even their biggest boosters are embracing the idea of scrutinizing pay packages.
Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, said a new regulator for Fannie Mae and Freddie Mac should have the power to approve executive compensation. Frank and Sen. Christopher J. Dodd, D-Conn., the Senate Banking Committee chairman, want to add the controls to a broad housing package that creates a new regulator.
Fannie Mae and Freddie Mac together hold or guarantee $5 trillion in mortgages - almost half the nation's total. Their stocks have plummeted on fears about their financial stability in a chaotic housing market where falling home values and rising defaults have contributed to large losses at the companies.
(© 2008 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)
