Paulson `Very Optimistic' on Freddie, Fannie Rescue

By John Brinsley

July 20 (Bloomberg) -- Treasury Secretary Henry Paulson predicted the Bush administration will prevail in its effort to convince Congress to pass legislation that would allow the government to rescue Fannie Mae and Freddie Mac.

``I'm very optimistic that we're going to get what we need from Congress,'' Paulson said on the CBS News ``Face the Nation'' program. ``Congress understands how important these institutions are.''

Paulson is pushing Congress to authorize the Treasury to purchase equity stakes in Fannie Mae and Freddie Mac, which account for about half of the $12 trillion mortgage market, 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.

``We're very close to getting reform,'' he said in a separate interview on CNN's ``Late Edition'' program. ``These are very important organizations -- they have a very important role to play -- and we need to make sure that they have access to adequate capital to get through this period.''

The economy is in a ``challenging time'' and probably will have ``slow growth'' for ``months'' as higher oil prices prolong the slowdown, Paulson said on CBS. The banking system is ``sound'' and regulators are being ``vigilant,'' though some banks are starting to struggle, he said.

Speech on U.S. Economy

The Treasury secretary is scheduled to spend the next two days in New York for meetings with executives from financial services companies and to give a speech July 22 on the condition of the U.S. economy and capital markets.

Regulators are aiming to resuscitate investor confidence in the firms after their shares this month fell to the lowest in more than 17 years on concern they may have insufficient capital to survive the collapse of the housing market.

``Their regulator has said they have adequate capital,'' Paulson told CNN. ``There's some worry, some concern in the capital markets, and that is why we came in with a plan to assure the markets that there will be adequate capital for them to meet all their needs.''

Under Paulson's proposal, Treasury would increase Fannie Mae's and Freddie Mac's credit lines from $2.25 billion each, buy shares in them if needed and give the Federal Reserve a role in setting their capital requirements.

`Central Role'

President George W. Bush, in his weekly radio address, yesterday 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 concerns it may put American taxpayers at risk while giving Treasury unprecedented authority.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, last week said he intends to tie the Treasury plan to the federal debt limit, capping the amount of taxpayer funding officials could use to help finance the mortgage firms.

Senate Banking Committee member Charles Hagel, a Nebraska Republican, sent a letter to Paulson last week asking why taxpayers should extend ``an unlimited line of credit'' to the companies while their chief executives ``continue to make multimillion dollar salaries and bonuses?''

Fannie Mae CEO Daniel Mudd, 49, was paid $11.6 million in salary, stock awards and other compensation last year. Freddie Mac Chief Richard Syron, 64, received $18.3 million in total pay last year.

House Democrats plan to include in their bill a measure that would grant almost $4 billion to 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