Paulson outlines next steps in financial recovery: U.S. Secretary of Treasury announces legislative reform effortsMortgagePress.comSecretary Henry Paulson, GSEs, Fannie Mae, Freddie Mac, Treasury
On Sept. 19, U.S. Treasury Secretary Henry Paulson announced a
comprehensive approach to combat the recent stress on financial
institutions and markets in the United States. Paulson stated that
illiquid mortgage assets are clogging the financial system and
preventing the return of investor confidence. In his statement,
Paulson announced he will work with Congress to alleviate this
pressure and pass legislation containing a "troubled asset relief"
program.
Paulson also outlined immediate actions to be taken by the
Treasury and government-sponsored enterprises (GSEs) Fannie Mae and
Freddie Mac.
1. The GSEs will increase their purchases of mortgage-backed
securities (MBS) and;
2. The Treasury will expand its temporary MBS purchase program.
A copy of Paulson's full statement, appears below.
Last night, Federal Reserve Chairman Ben Bernanke, SEC Chairman
Chris Cox and I had a lengthy and productive working session with
Congressional leaders. We began a substantive discussion on the
need for a comprehensive approach to relieving the stresses on our
financial institutions and markets.
We have acted on a case-by-case basis in recent weeks,
addressing problems at Fannie Mae and Freddie Mac, working with
market participants to prepare for the failure of Lehman Brothers,
and lending to AIG so it can sell some of its assets in an orderly
manner. And this morning we've taken a number of powerful tactical
steps to increase confidence in the system, including the
establishment of a temporary guaranty program for the U.S. money
market mutual fund industry.
Despite these steps, more is needed. We must now take further,
decisive action to fundamentally and comprehensively address the
root cause of our financial system's stresses.
The underlying weakness in our financial system today is the
illiquid mortgage assets that have lost value as the housing
correction has proceeded. These illiquid assets are choking off the
flow of credit that is so vitally important to our economy. When
the financial system works as it should, money and capital flow to
and from households and businesses to pay for home loans, school
loans and investments that create jobs. As illiquid mortgage assets
block the system, the clogging of our financial markets has the
potential to have significant effects on our financial system and
our economy.
As we all know, lax lending practices earlier this decade led to
irresponsible lending and irresponsible borrowing. This simply put
too many families into mortgages they could not afford. We are
seeing the impact on homeowners and neighborhoods, with 5 million
homeowners now delinquent or in foreclosure. What began as a
sub-prime lending problem has spread to other, less-risky
mortgages, and contributed to excess home inventories that have
pushed down home prices for responsible homeowners.
A similar scenario is playing out among the lenders who made
those mortgages, the securitizers who bought, repackaged and resold
them, and the investors who bought them. These troubled loans are
now parked, or frozen, on the balance sheets of banks and other
financial institutions, preventing them from financing productive
loans. The inability to determine their worth has fostered
uncertainty about mortgage assets, and even about the financial
condition of the institutions that own them. The normal buying and
selling of nearly all types of mortgage assets has become
challenged.
These illiquid assets are clogging up our financial system, and
undermining the strength of our otherwise sound financial
institutions. As a result, Americans' personal savings are
threatened, and the ability of consumers and businesses to borrow
and finance spending, investment, and job creation has been
disrupted.
To restore confidence in our markets and our financial
institutions, so they can fuel continued growth and prosperity, we
must address the underlying problem.
The federal government must implement a program to remove these
illiquid assets that are weighing down our financial institutions
and threatening our economy. This troubled asset relief program
must be properly designed and sufficiently large to have maximum
impact, while including features that protect the taxpayer to the
maximum extent possible. The ultimate taxpayer protection will be
the stability this troubled asset relief program provides to our
financial system, even as it will involve a significant investment
of taxpayer dollars. I am convinced that this bold approach will
cost American families far less than the alternative a continuing
series of financial institution failures and frozen credit markets
unable to fund economic expansion.
I believe many Members of Congress share my conviction. I will
spend the weekend working with members of Congress of both parties
to examine approaches to alleviate the pressure of these bad loans
on our system, so credit can flow once again to American consumers
and companies. Our economic health requires that we work together
for prompt, bipartisan action.
As we work with the Congress to pass this legislation over the
next week, other immediate actions will provide relief.
First, to provide critical additional funding to our mortgage
markets, the GSEs Fannie Mae and Freddie Mac will increase their
purchases of mortgage-backed securities (MBS). These two
enterprises must carry out their mission to support the mortgage
market.
Second, to increase the availability of capital for new home
loans, Treasury will expand the MBS purchase program we announced
earlier this month. This will complement the capital provided by
the GSEs and will help facilitate mortgage availability and
affordability.
These two steps will provide some initial support to mortgage
assets, but they are not enough. Many of the illiquid assets
clogging our system today do not meet the regulatory requirements
to be eligible for purchase by the GSEs or by the Treasury
program.
I look forward to working with Congress to pass necessary
legislation to remove these troubled assets from our financial
system. When we get through this difficult period, which we will,
our next task must be to improve the financial regulatory structure
so that these past excesses do not recur. This crisis demonstrates
in vivid terms that our financial regulatory structure is
sub-optimal, duplicative and outdated. I have put forward my ideas
for a modernized financial oversight structure that matches our
modern economy, and more closely links the regulatory structure to
the reasons why we regulate. That is a critical debate for another
day.
Right now, our focus is restoring the strength of our financial
system so it can again finance economic growth. The financial
security of all Americans their retirement savings, their home
values, their ability to borrow for college, and the opportunities
for more and higher-paying jobsdepends on our ability to restore
our financial institutions to a sound footing.
For more information, visit www.treas.gov.
