Geithner: We're Not Ready to Overhaul Fannie, Freddie

U.S. Treasury Secretary Timothy GeithnerThe overhaul of the U.S.-“sponsored’ housing finance system – more commonly known as Fannie Mae and Freddie Mac – won’t even be proposed until next year, U.S. Treasury Secretary Timothy Geithner told Congress today.
But Geithner said it won’t be necessary to place Fannie and Freddie fully on the federal budget, despite the two corporations being under U.S. “conservatorship,” giving the government a quasi-majority stakeholder position in the publicly-traded entities.
This “de facto nationalization,” as some lawmakers have called it, has been the source of criticism from both parties and even U.S. banking regulators, who have stated publicly that a complete makeover of Fannie and Freddie is necessary as part of financial regulatory reform.
“That’s going to be a difficult set of reforms, but we do not believe it’s necessary to consolidate the full obligations of those entities onto the balance sheet of the federal government at this stage,” Geithner told the House Budget Committee today.
He added that it’s very important that “we make it clear to investors around the world that we will make sure that we will take the actions necessary” to stabilize the two companies if circumstances call for additional action.
At the peak of the financial crisis of 2008, then-Treasury Secretary Henry Paulson placed Fannie and Freddie under virtual U.S. control. At the time, the two entities owned or guaranteed about half of the $12 trillion mortgage market.
The two corporations were created by Congress for the purchase and securitization of U.S. mortgages, providing liquidity to the housing sector and, in turn, bolstering the U.S. economy.
But throughout the housing bubble build-up, the two gobbled up billions in subprime mortgage-backed securities and other high-risk private-label securities, and U.S. officials feared they would not have sufficient capital to cover massive losses.
The administration estimates that Fannie and Freddie losses will cost the government more than $54 billion in fiscal 2011, and another $23 billion in fiscal 2012.
Freddie Mac today reported a loss of $7.8 billion in the fourth quarter, and said it may need to borrow from the U.S. Treasury credit line this quarter. Freddie has already taken $52 billion from the credit line established in late 2008. Fannie has pulled $61 billion from the same credit line. Fannie has yet to report its fourth quarter figures.
The Obama administration modified the terms of the Fannie-Freddie credit facility on Christmas Eve, allowing virtually unlimited losses for both companies.
The Obama administration only said it would provide a long-term plan for Fannie and Freddie in the White House budget proposal released this month, but no specifics were provided – except that the administration would monitor the government-sponsored enterprises closely.

2 thoughts on “Geithner: We're Not Ready to Overhaul Fannie, Freddie

  • February 26, 2010 at 3:10 pm

    Another government fiasco. Blame this one on the dems and CRA. And these are the same people who want to take healthcare over? Banana republic here we come!

  • February 26, 2010 at 7:25 pm

    The Treasury Secretary is EXACTLY right to send the market the message that they will do whatever it takes. He is also prudent in suggesting that they wait until next year to suggest any long term solutions. The more time and distance that can be put between these long terms solutions and the crisis, the better. No need to run a 2 minute drill here.
    Mark F. Ferraris
    Orchard Street Partners LLC

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