The Treasury Department and top Democrats took an upbeat tone after meetings Thursday to ease lawmakers’ concerns over an ambitious plan to boost investor confidence in the troubled mortgage finance giants, Fannie Mae and Freddie Mac.
A central issue is how to find some comfort zone, giving Treasury Secretary Henry Paulson the discretion he needs for the rescue effort while also assuring Congress that it is not opening the gate for a “runaway horse.”
“I’m pretty optimistic, in fact I’m very optimistic,” said House Financial Services Committee Chairman Barney Frank, after talks with Paulson. The Massachusetts Democrat said he will have a final bill drafted by Tuesday, and Paulson predicted that Congress will finally approve a “very acceptable result.”
Paulson, a veteran investment banker, is seeking an extraordinary 18-month grant of authority to both extend new credit to the two government sponsored entities or GSE’s—and for the first time purchase an equity interest. His hope is this will be a sufficient show of strength to calm the credit markets, without ever being exercised: “I have a bazooka in my pocket,” Frank joked.
But the potential exposure for taxpayers could be huge, and Frank had suggested Thursday that any Treasury expenditures should be subject to the federal debt limit which can act as a brake of sorts for Congress.
“The fact that any expenditure under this bill would be subject to the debt limit is a cap in effect on the amount that you can put here, “ Frank said after meeting the Senate Banking Committee Chairman Christopher Dodd (D-Conn.). Dodd himself was more cautious but agreed that some arrangement was needed to ease political concerns.
“Members are looking for some way to get their arms around this,” said Dodd. “This is an unprecedented act.”
In fact, the current debt ceiling is about $9.815 trillion, with only about $375 billion in running room still under it. Treasury has already predicted that this will be soon exhausted by normal government operations and the Democrats’ new 2009 budget plan calls for raising the ceiling to $10.615 trillion –an $800 billion increase.
Treasury officials were cool then to such a direct link between the debt ceiling and their mortgage rescue plan. But talks have begun with House Budget and Ways and Means Committee leadership, which typically manage debt ceiling issues, and Frank said he was comfortable with the “variations” being discussed.
“I am not for unlimited expenditure but I understand the limits that are there,” Frank said. And he argued that the mortgage rescue effort has to be seen in the context of the larger housing bill to which it would be attached when brought to the House floor next week.
That legislation includes long sought reforms and tougher regulation of Fannie and Freddie, with the path marked out toward putting them in receivership if needed.
“The underlying bill to which this is attached gives a very tough regulator the power to put the whole thing into receivership,” Frank said. “Long before you got into the high numbers it would be in receivership.”
New Hampshire Sen. Judd Gregg, the ranking Republican on the Senate Budget Committee, warned that Congress has to be careful still to protect Paulson’s discretion.
“We could end up paying nothing here from the taxpayers’ accounts if we stabilize the credit markets,” Gregg told Politico. “If we don’t stabilize the credit markets, what we know is going to happen is a massive meltdown which is going to cost the government huge amounts of dollars.”
“My view is if you are going to give them this authority you should give them the authority because the only way you stabilize the market is by making it clear we’re sort of all in and that we are going to take a position where nobody can question.”
“Otherwise you’re doing a halfway step which in the end may not resolve the issue,” Gregg said. “Credit markets may look at it as anemic.”
