Treasury Secretary Henry Paulson got some tough questioning from lawmakers on Tuesday when presenting his plan to prop up mortgage finance giants Fannie Mae and Freddie Mac.
Paulson told the Senate Banking Committee that the two firms have adequate capital to continue to operate. He said proposals he announced Sunday - expanding the Treasury credit line for or buying equity in Fannie and Freddie - were "backstops" to assure the markets.
"Our proposal was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac," he said. "At the same time, recent developments convinced policymakers and the [firms] that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary."
The two firms, known as government sponsored enterprises, or GSEs, were set up by Congress to help provide mortgage funding, but they are owned by private sector shareholders. Their shares have plunged in recent days among concerns that they would need to raise additional funds to cover future losses or need to be taken over by its federal regulator. Either step would reduce or wipe out the value of current shareholders' stakes.
Committee Chairman Sen. Christopher Dodd, D-Conn., applauded Paulson for taking the steps to support the two firms.
"Inaction is not an option in my view," he said. "We can not just watch events unfold."
Dodd repeated comments in recent days that he believes Fannie and Freddie are both operating on a sound financial basis.
