Paulson Says He Doesn't Plan to Add Cash to Fannie, Freddie

By John Brinsley

Aug. 11 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said there are no plans to inject capital into Fannie Mae and Freddie Mac after the two mortgage companies posted combined losses of $3.12 billion last week.

``We have no plans to insert money into either of those two institutions,'' Paulson said in an interview with NBC's ``Meet the Press'' broadcast yesterday from Beijing. He added that their results were ``not a surprise'' and that the housing slump will last beyond this year.

Paulson last month brokered a plan to bolster the two government-sponsored enterprises that includes giving Treasury the right to buy their shares. Fannie and Freddie, which account for almost half of the $12 trillion mortgage market, reported losses three times wider than estimated, prompting some investors to predict that Paulson will be forced to act.

``Given that Fannie Mae and Freddie Mac are solely involved in housing, that's their sole business, and given the magnitude of the housing correction we've had, it's not a surprise to me to see those losses,'' Paulson said.

Paulson, the former chairman of Goldman Sachs Group Inc., said he won't serve as Treasury secretary under the next president, regardless of who is elected in November.

``I'm going to run right up until the end,'' said Paulson, 62, who joined the Bush administration in July 2006, succeeding John Snow. ``I will do everything I can to make for a smooth transition, to work closely with my successor here in Treasury.''

Biggest Threat

Paulson said Freddie and Fannie's financial problems underscored his view that the housing crisis remains the biggest threat to the U.S. economy. The worst housing slump since the Depression won't end quickly, he said.

``We have got some serious issues that we're dealing with in our economy,'' he said. ``I believe it's going to take us well beyond the end of the year to work through all the housing problems.''

Home prices in 20 U.S. metropolitan areas fell in May by 15.8 percent from a year earlier, the most on record, the S&P/Case-Shiller home-price index showed on July 29. Foreclosure filings in the second quarter jumped 121 percent from a year earlier, RealtyTrac Inc., said last month.

`Humbling' Experience

Acknowledging that the housing and credit crises have been ``humbling,'' Paulson said it was important to reassure investors around the world that the U.S. is addressing its problems.

``The period of turmoil that we're going through in our capital markets today is different from some of the periods we've had in the past, in that the root cause took place right in the United States of America,'' he said. At the same time, ``long-term economic fundamentals of the United States compare very favorably'' he said.

Paulson downplayed the need for a second economic stimulus package, saying the $168 billion plan enacted in February had helped boost consumption and growth in the second quarter of the year and would continue to do so. House Speaker Nancy Pelosi, a Democrat from California, has called for a second package of about $50 billion.

``Let's see how this program works in the third quarter,'' Paulson said.

His comments came after the prospect of rising inflation and slower growth led Federal Reserve Board Chairman Ben S. Bernanke and his colleagues to keep the benchmark rate at 2 percent last week.

Impact of Rebates

Gross domestic product shrank in the fourth quarter of 2007, and grew at just an average 1.4 percent annual rate in the first six months of this year, aided by some $78 billion in tax rebates sent to Americans between late April and June.

Shares in Fannie and Freddie have plummeted more than 80 percent this year on concern they don't have sufficient capital to withstand record foreclosures on the $5.2 trillion of mortgages they own or guarantee.

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., last week said the Treasury will probably be forced to buy as much as $30 billion of preferred shares in the two.

Freddie is having trouble raising $5.5 billion in capital it announced in May, and Chief Executive Officer Richard Syron said he is waiting for a more ``propitious time'' to raise the money. Fannie has raised $14.4 billion in fresh reserves since late last year; Freddie has raised $6 billion.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net