The Fannie/Freddie Bailout: What's Next

U.S. Treasury Secretary Hank Paulson discusses taxpayer cost and other fallout

by Maria Bartiromo

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U.S. Treasury Secretary Henry Paulson during a press conference in Washington. Tim Sloan/AFP/Getty Images

The dramatic takeover of Fannie Mae (FNM) and Freddie Mac (FRE) by the federal government calmed the fears of foreign central banks and big investors and rallied the market—at least until jitters about Lehman Brothers' (LEH) ability to raise capital drove down the S&P 500. But the bailout also fueled a debate that will rage for some time over the wisdom of Washington creating financial-services companies and putting taxpayers on the line when those entities run into trouble. That is one more contentious economic issue to be confronted by the Administration that takes office next January. A more immediate concern that is expected to be center stage when Congress convenes hearings on the takeover is the golden handshake that the outgoing heads of Fannie and Freddie are getting. To get a bead on why the feds acted when they did, I talked with the architect of the takeover, Treasury Secretary Hank Paulson, on Sept. 10. But when the possibility of a Lehman bailout was raised, Paulson suddenly ran out of time.

Maria Bartiromo

Mr. Secretary, the events of last weekend have been called a lot of things—a "bailout," a "stop loss." Can you characterize the action you're taking with regard to Fannie and Freddie?

Treasury Secretary Henry Paulson

Well, I want to remind you that this commitment is being done in a way that protects the taxpayers. And to the extent the taxpayers put funds in these companies, they will be repaid before the shareholders get a penny. So I would characterize this as a step taken to clarify and strengthen government support to stabilize these companies so they can perform their very important mission at this time—to get us through this housing correction, to stabilize the capital markets, and to do this while protecting the taxpayer to the maximum extent possible.

What is your best estimate of what the bailout will wind up costing taxpayers?

It is very difficult to make a projection here. I think this will depend on a number of factors, including the timing of the recovery in the housing market and recovery in the economy. But there are a number of reasonable cases where even the existing shareholders will end up having their stock price come back.

Is it fair to say, as the head of a private equity firm suggested to me yesterday, that this will cost taxpayers several hundred billion dollars?

I certainly have not come up with that estimate.