Paulson: Bailout Cost Depends on Housing Rebound
The taxpayer cost of bailing out Fannie Mae and Freddie Mac won't be known until the housing market and the economy stabilize, Treasury Secretary Henry Paulson said Monday.
But Paulson insisted in a CNBC interview that taxpayers will be protected in a move he described as vital to assuaging fear over the domestic housing and financial markets.
"We obviously don't know that yet," Paulson said in response to the question of how much public money will be required to save the two government-sponsored enterprises from failure. "I say to the taxpayer if and when we put money in the taxpayer is going to be protected and the government is going to be repaid before the shareholders get a penny."
The question of taxpayer financing for Fannie and Freddie "ultimately is going to be answered by how long it takes housing prices to stabilize and the economy to come back," he said.
"The housing downturn is at the heart of the problems that our economy is facing right now," Paulson added. "Until the bulk of that is behind us we're going to continue to have stress" on the economy and stock market.
Paulson generally defended the bailout, saying it was vital that banks know Fannie and Freddie will continue to provide liquidity in the housing finance industry. The two companies operate in the secondary mortgage market, buying debt that primary lenders don't want on their balance sheets.
"This is not something I wanted to do, this is not something you're happy about. But I'm not going to second-guess it because this was something that was necessary," he said. "All I can do is play the hands I've been dealt and to play them in a way that I think is going to be in the best interest of the American people."
Concern from large lending institutions and central banks in both the US and abroad made stabilizing Fannie and Freddie critical, he said.
Though Paulson did not address the issue specifically, Pimco bond chief Bill Gross said on CNBC last week that he, as well as hedge funds and other investors with which he deals, would not be buying any more bank debt until Treasury stepped in to shore up the market.
"I think housing is at the heart of the problem and these companies are so big and so ubiquitous and they're owned by investors all over the world. You're obviously going to get concern. There was definitely concern overseas. There was concern here in this country," Paulson said.
"Overseas buyers had really reduced their level of buying. Some had stopped buying and there had been some modest selling no doubt about that," he added.