Transcript: Paulson on Fannie, Freddie Bailout

Liesman: Markets want to know, Mr. Secretary, at this point, have we advanced the ball in terms of fixing this thing, or have all you done here is preserve the status quo such as the private entities, the entities are now able to guarantee mortgages?

Paulson: Let me just say to you, I think this action more than any other action I have seen done here has advanced the ball for those focusing on the structural issues, because I think it is quite clear to the vast majority of observers here that there are systemic risks. It is quite clear there are. With these companies in conservatorship, this is something that needs to be dealt with. There are a number of aspects of this transaction that will, I think, encourage future policymakers to address this problem. It just has to be addressed. I'm sure it will be addressed. This is an important step forward in addressing it.

Liesman: Does that include the fact that the government will now provide financing to the mortgage-backed security market?

Paulson: That is -- this in terms of the government buying mortgage-backed securities, that is a temporary measure and it is one, I think, that will be a sign of confidence, and I also believe that the government treasury buying mortgage-backed securities is not a difficult thing to do given the fact that we know these are going to be money good now, and given the spreads here, I think we can manage that in a way in which the taxpayer certainly won't lose any money and it should help the mortgage market be a very important part of what we are doing.

Liesman: Mr. Secretary, there are millions of shareholders of Fannie Mae and Freddie Mac

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[FRE  Loading...      ()   ] both holding the common and preferred wondering, does the Secretary believe my shares have any money or any value at all right now? How do you respond to that?

Paulson: I can't respond to that, because that question can only be answered when we look to the future, and there are certainly very reasonably scenarios, very reasonably scenarios where the housing market recovers, the economy recovers, the situation works out over a time frame where there will be value in those shares. If there's value in those shares, no way the government will lose anything.

Liesman: But the government gets paid back first before anything is available for the common or the preferred?

Paulson: Absolutely. That's the way it should be.

Liesman: You stated before your philosophy on this: the common and the preferred as equity ought to bear the risk here. Of course, that's the way the system works. If you have the right to succeed, also with it, has to come the right to fail. I mean, for the government to come into a situation like this the way we have, the taxpayers have to come ahead of the shareholders. In your philosophy and thinking on this, the subordinate debt holders shouldn't bear the same risk?

Paulson: In my thinking on this, we decide to come in and came in below the subordinated debt holders. We thought that was important with what we were trying to do for the capital markets and for the housing market to come in at this level here.

Liesman: Last question here, Mr. Secretary, as you have said, there are a lot of commercial banks out there, private commercial banks, that own a lot of the preferred. Are you concerned about the effect on the banking system from what's happened now with the preferred?

Paulson: Well, there's a lot of work done on this by all of the banking regulators, and what they said, they could identify very few, a limited number of banks have owned enough Fannie or Freddie preferred, so it would make a significant difference.

No one knows for certain, because it is impossible to identify every bank that might hold this. So what the regulators have done is come together. I'm sure you have heard what's been said. They are all over this. Any bank that has Fannie or Freddie preferred and realized or unrealized losses were such that it could risk their status and they should come into their agency and the regulators will work with them to address the problem on a case-by-case basis. I think this is something that is manageable.

Liesman: At the end of the day, are we going to be happy we did this? Or is this something we are going to look back on later?

Paulson: This is not something I wanted to do. This is not something you are happy about, but I'm not going to second guess it because this was something that was necessary. It was so much better than the next best alternative that - as I've said all the way along, all I can do is play the hands I've been dealt and play them in a way I think is going to be in the best interest of the American people.

Liesman: Mr. Secretary, thank you for your time this morning.