By John Brinsley
July 21 (Bloomberg) -- Treasury Secretary Henry Paulson suggested that U.S. lawmakers must pass his rescue plan for Fannie Mae and Freddie Mac to avert a slide in confidence in U.S. financial markets.
International ``investors need to know that we in the United States understand how important these institutions are to the capital markets,'' Paulson said yesterday on CNN's ``Late Edition'' program. He separately declined to reject Democrats' calls for a second fiscal-stimulus package, as the effects of the first initiative wane.
Paulson's remarks, on the eve of a two-day visit to Wall Street, indicate he's raising the stakes for lawmakers debating his proposed rescue. He reiterated his optimism that Congress will enact the plan, including potentially unlimited government investment in the firms that account for almost half the $12 trillion U.S. home-loan market.
``It sounds like a deal is going to get done,'' Robert Davis, executive vice president of the American Bankers Association in Washington. Paulson ``is not using his political capital to sell an unpopular program. It's a program that can get broad support even if it's controversial.''
The Treasury chief, appearing on Sunday morning television shows in Washington for the first time since the government's rescue of Bear Stearns Cos. in March, said ``I don't want to speculate about a second stimulus package.''
Pelosi Plan
House Speaker Nancy Pelosi, a California Democrat, is pushing a measure to boost the economy with about $50 billion in tax rebates and public works projects.
Paulson said that the first package, totaling about $110 billion in tax rebates, is ``clearly'' butressing consumer spending.
Economists this month raised their estimates for economic growth in the second quarter to account for the first stimulus. At the same time, they reduced their projections for the second half, anticipating the impact will fade. The median estimate indicated a 0.5 percent annualized expansion rate in the final three months of 2008, the weakest in six years.
The Treasury secretary is scheduled to spend today in private meetings with executives from financial services companies and will give a speech tomorrow on the condition of the U.S. economy and capital markets.
Paulson yesterday said the biggest challenge the economy faces is reversing the downturn in housing, where Fannie Mae and Freddie Mac are key sources of financing.
New Regulator
The Treasury chief is pushing Congress to authorize the Treasury to purchase equity stakes in Fannie Mae and Freddie Mac, and expand government-backed credit lines to them. He also said he wants the legislation to include a measure that gives ``real teeth'' to the companies' regulator, the Office of Federal Housing Enterprise Oversight.
Freddie Mac shares have tumbled 73 percent this year and Fannie Mae has dropped 66 percent on concern about the value for mortgage-backed securities that the two government-sponsored enterprises sell to investors worldwide.
``What the plan does on the one hand is try to provide a shot of confidence that the GSEs will be able to fund themselves and keep operating,'' said Bruce Kasman, chief economist of JPMorgan Chase & Co., in New York. ``But it also creates some uncertainty as to what the ultimate obligation of the government is going to be.''
`Very Optimistic'
In a separate interview on the CBS News ``Face the Nation'' program yesterday, Paulson said ``I'm very optimistic that we're going to get what we need from Congress.''
The economy is in a ``challenging time'' and probably will have ``slow growth'' for ``months'' as higher oil prices prolong the slowdown, Paulson told CBS. The banking system is ``sound'' and regulators are being ``vigilant,'' though some banks are starting to struggle, he said.
Five banks have failed so far this year, fewer than the 250 average during the savings-and-loan crisis almost two decades ago, Paulson said. Still, the list of troubled banks is bound to ``grow longer,'' he said on CBS.
On CNN, Paulson said he was not ``caught by surprise'' by concerns that Fannie Mae and Freddie Mac, two companies that were created with government charters, wouldn't have adequate capital.
``I was working quite diligently with Congress to get reform, and we're very close to getting reform,'' he said.
President George W. Bush, in his weekly radio address, two days ago said the two play a ``central role'' in the housing system and are needed to continue providing credit ``during this time of stress in the financial markets.''
Lawmakers from both parties have sought to put constraints on the plan on concern it may put American taxpayers at risk while giving the Treasury unprecedented authority. House Democrats also plan to include in their bill almost $4 billion for communities to purchase foreclosed homes, a measure Bush has threatened to veto.
To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net
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