Feds to reveal plan to steady Fannie Mae, Freddie Mac

WASHINGTON -- When Treasury Secretary Henry M. Paulson Jr. reveals how the Bush administration intends to steady tottering mortgage giants Fannie Mae and Freddie Mac, he will likely be walking a knife edge between two views on what the government should do.

Paulson is expected to announce his plan this afternoon.

Free-market analysts and their allies in the Bush administration believe the government-chartered but shareholder-owned companies pose a threat to Washington's own solvency and must be thrown into a bankruptcylike receivership, run by the government until the current financial crisis eases, and then be broken up or sold off.

On the other hand, congressional Democrats and major financial market players argue that the government should spare no expense in rescuing Fannie Mae and Freddie Mac, arguing that the two mortgage giants must be healthy not only for Americans to buy houses but for the economy to regain its footing.

Late Saturday afternoon, Paulson's aides were quietly spreading word that the Treasury secretary was hoping to find a middle ground between the two extremes by establishing the government as the "conservator" of the companies, a less Draconian step than forcing the companies into full-blown receivership, according to senior figures on Capitol Hill.

But those officials said that didn't mean the Treasury secretary has agreed to a big injection of taxpayer money or had settled on what will happen to the firms and their stockholders.

"This has no impact one way or the other on what the ultimate shape of the institutions is," said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, who has been in regular contact with Paulson and his aides.

A conservatorship "won't be good for shareholders, but it will be good for housing," Frank said.

The question is whether a middle course will be tenable.

"We want to see the money," said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., better known as Pimco, in Newport Beach, Calif. Gross wants Fannie and Freddie to get huge infusions of federal cash.

"If Paulson comes out with a few billion dollars, that's nice, but it doesn't do the job. It doesn't speak to Fannie and Freddie being able to keep making mortgages and helping the economy recover," he said.

Speaking for the other side, Peter J. Wallison, a former Reagan administration Treasury official and perhaps the firms' sharpest critic, warned that they have grown so large and unwieldy that they represent a costly and unmanageable liability for the government.

"If there's an injection of capital, that means Treasury will prop up Fannie and Freddie, they'll survive in pretty much their current form and the taxpayers will suffer," said Wallison, who is now a senior analyst at the conservative American Enterprise Institute.

Between them, Fannie and Freddie own or guarantee more than $5 trillion of U.S. home mortgages, or about half the total outstanding.

Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June.

The takeover of Fannie Mae and Freddie Mac moved to the forefront of the presidential campaign Saturday as candidates and congressional leaders seized on the enormous implications for taxpayers and the economy.

At a rally in Colorado Springs, Colo., Republican vice presidential nominee Sarah Palin said, "They've gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

Democratic nominee Barack Obama, speaking in Terre Haute, Ind., said, "These entities are so big and they're so tied into the housing market that it is probably true that we have to take steps to make sure they don't just collapse, because the housing market, which is already weakened, would be in even worse shape if we didn't take some steps."

In July, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the companies if needed. Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.

Fannie Mae was created by the government in 1938, and was turned into a public company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.