Parsing Paulson: The Fannie and Freddie Bailout

Hank Paulson is a tough guy. He's no pushover: just look at that phone call to Jamie Dimon, telling him that anything over $2 a share was altogether far too much money to pay for Bear Stearns. So what are we to make of his statement regarding Fannie Mae and Freddie Mac? With apologies to Jack, here's the parse:

Paulson: Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

Translation: We can't afford for Fannie and Freddie to go bust, and we're Republicans, so there's no way we're going to nationalize them. And no one could conceivably afford to buy them. Which leaves only one option: somehow maintaining the status quo. Which is not going to be easy, seeing as how their trillions of dollars in assets are imploding daily in the biggest US housing crunch since the Great Depression.

Paulson: GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

Translation: China and other major foreign investors hold a huge amount of Agency debt, on the understanding that it's risk-free. I'm here to tell them that, yes, it's risk free. Nothing to worry about here. And to prove that there's nothing to worry about, I'll put out a press release on a Sunday night which is designed to reassure you all. There, you're reassured, right?

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.

Translation: See? I told you I would reassure you. I have a three-part plan for immediate action! OFHEO has signed off on it! What could be more reassuring than that?

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.

Translation: If you guys won't lend the Agencies money, I will. Maybe. But now you know that, you won't be worried about them any more, and I won't even need to negotiate those "conditions for accessing the line of credit". Will I. I said, will I. Good.

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.

Translation: The panic over Fannie and Freddie wasn't connected to any news, beyond the fact that their share prices were falling. So if I say I might come in and buy their shares, then the traders will step in and start bidding the stock up in the hope that they'll be able to flip it to me at the new, higher, price. And then, because the stock is rising, I won't need to buy the shares at all. Clever, eh? Well, it's worth a try, anyway.

Paulson: Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Translation: Don't call this a bailout.

Paulson: Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.

Translation: When was the last time you saw a "two-point plan"? I needed a third point, and I thought that maybe a few phone calls between the Fed and OFHEO might count. Sound good to you?

Paulson: I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

Translation: Congress thought it was just going to be messing around with OFHEO, but now they're going to be asked to authorize the purchase of billions of dollars of the most underperforming shares on the NYSE. But if they don't roll over and do just that, they'll know that I'll be pointing the finger at them if Fannie and Freddie run into any further difficulties. And who wants the blame for nobody being able to get a mortgage any more? They'll do the right thing, the craven little pols. Frankly, they're the least of my worries.