Paulson should consider receivership for Fannie, Freddie: report

(Reuters) –

The U.S. Treasury Secretary could make greater

progress toward a safer financial system by putting Fannie Mae

(FNM.N) and Freddie Mac (FRE.N) into federal receivership, the

Wall Street Journal said on Tuesday.

If the current law doesn’t give Henry Paulson that power,

he should seek it from Congress, the newspaper said in an

editorial on its website.

The Treasury Department and the Federal Reserve on Sunday

offered massive aid to bolster confidence in the companies and

head off a potential financial market meltdown.

Together, the country’s two biggest mortgage firms finance

about $5 trillion in U.S. home loans, or about half of the

total, so are too big to fail, the Wall Street Journal said.

“The question has been how to manage and regulate these

monsters in a way that minimizes risks to the larger financial

system and taxpayer,” the editorial said.

Paulson wants Congress to give the government more power to

rein in the two companies, including with a capital injection

of preferred stock if required.

“This is progress, but it’s not aggressive enough given the

risks. He could make more progress more rapidly toward a safer

financial system by putting the companies in federal

receivership,” the newspaper said.

Paulson could then appoint a prominent financial figure

with bipartisan credibility as a receivership czar, with a

mission to protect taxpayer interests.

A czar would have the power to replace the companies’

management and directors, as well as give priority to taxpayers

above the current private shareholders if the government does

inject capital, the newspaper said.

Receivership does not mean the companies will fold

overnight. They continue to hold trillions of dollars in

mortgage assets, and they would continue to buy and package

mortgages, the paper said.

But as a first priority, a receiver would be able to rein

in their portfolios of mortgage-backed securities — currently

about $1.5 trillion — that are a major source of their risk.

Later, as the mortgage crisis eases, the receiver could

decide whether to wind the companies down, sell them in parts

to the private sector, or let them continue in far more

restricted form, the paper said.

The receivership option would also help Paulson get out

ahead of the many other looming financial problems. Airline and

car companies’ failure may come in the future, the paper said.

Putting Fannie and Freddie in firmer hands now will

reassure investors that at least one risk is being well

managed, reducing public fear that the government is

overwhelmed, the paper said.

(Reporting by Pratish Narayanan in Bangalore; editing by

Neil Fullick)