A Time for Urgency
"What Others Say"07/23/2008
NY Times Editorial
July 23, 2008
In the nearly two weeks since he announced a plan to rescue Fannie Mae and Freddie Mac from insolvency, if need be, Treasury Secretary Henry Paulson has insisted that it is vital for Congress to approve the proposal quickly, preferably, this week. To help ensure quick approval, it has been attached to a larger foreclosure prevention bill that Congress is finalizing.
Unfortunately, support for swift passage is mixed from one important quarter: Mr. Paulson’s boss, President Bush.
On Monday, the White House renewed its threat to veto the foreclosure prevention bill if it contains a $4 billion block grant program for states to buy up foreclosed properties. The veto threat is misguided, first, on policy grounds. Mr. Bush wrongly portrays the grant as a handout to speculators when its main thrust actually is to protect communities from a destabilizing buildup of abandoned, unsold homes.
The veto threat also is a bad idea politically. Mr. Bush has not objected when the big firms and rich executives of Wall Street have been on the receiving end of federal assistance, but now he is threatening to block a measure to aid hard-hit neighborhoods filled with ordinary Americans. Worst of all, at this juncture in the year-old financial crisis, when perceived weakness of Fannie Mae and Freddie Mac threaten global financial upheaval, Mr. Bush’s veto threat undermines the urgency that his treasury secretary is rightly seeking to convey. That complicates passage of the rescue plan and presents a picture of policy disarray to the rest of the world.
The purpose of the rescue proposal — which would allow the Treasury Department to use taxpayer dollars to buy obligations and securities of Fannie Mae and Freddie Mac, if needed, to keep the companies afloat — is to restore confidence in the United States’ ability and commitment to contain the financial crisis. If Mr. Bush himself is a roadblock — and lawmakers, following his cue, find their own reasons to delay and finagle — confidence will be damaged, not bolstered.
Mr. Paulson must also acknowledge, more clearly than he has so far, that he is asking Congress to approve a plan that puts taxpayers at great risk. He has been playing down that risk to date, feeding public insecurity rather than reducing it.
In an interview on Tuesday with reporters and editors at The Times, Mr. Paulson said the risk of taxpayer loss was lessened because Fannie and Freddie had “good” collateral for any loans they may receive. But the audit of the two companies by federal regulators is not yet complete, and, in fact, questions remain about the quality of the assets the companies hold and guarantee.
On Tuesday, the Congressional Budget Office reported that 15 percent of their portfolios —$780 billion — is composed of assets that are subprime or Alt-A, the level just above subprime. The budget agency believes that there’s a better than 50 percent chance that the government would never have to step in to bailout the companies. But if it had to, the sums could be huge.
Mr. Paulson should be upfront with Americans about the risk and explain that the best way to deal with it is to develop a comprehensive response. He should also be frank about the far worse risks of delay and inaction. Foreign purchases of Fannie and Freddie obligations comprise a big chunk of the billions of dollars that the United States needs every day just to balance its books. Confidence in the companies is inseparable from confidence in the dollar itself.
The president must lead and Congress must act, and in a timely way. The nation’s leaders bear enormous responsibility for their inaction as the financial crisis developed. They should not compound that sin by failing to take the necessary, if politically unpopular, steps to clean up the mess they helped to create. And they must take those steps soon.