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Stock Markets Soar After Freddie, Fannie Bailouts
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"We did not sit down and figure this out with a calculator," Paulson told CNBC, because the stability of the financial markets seemed the more important issue. "This is about our financial markets, confidence in our financial markets."
The takeover of the two companies "should take a lot of uncertainty out of the market in one quick move," trader Matt Buckland, at CMC Markets in London, told the Bloomberg news service.
Central banks in Asia have been major investors in Fannie and Freddie securities, and the extension of an explicit U.S. government guarantee to that debt was heralded in Tokyo and Beijing.
"We expect the action would lead to stabilize the U.S. [mortgage-backed securities] market, financial market and the international financial market," Bank of Japan head Masaaki Shirakawa said at a meeting in Switzerland, the Reuters wire service reported.
"From my point of view this is positive," said Zhou Xiaochuan, governor of China's central bank.
Asian banks had begun curbing their purchases of Fannie and Freddie securities, and investors generally had been insisting on higher interest rates -- driving up the company's operating costs and pushing mortgage rates higher. Officials hope the takeover plan will reverse that trend, and could help revive the housing market by lowering the cost of borrowing.
In the CNBC interview, Paulson said the growing concern of foreign investors about the health of Fannie and Freddie was among the things that prompted him to take action.
"There was definitely concern overseas," Paulson said. Foreign investors "have reduced their level of buying and some had stopped buying and there was some selling. . . . This was just obvious."
An estimated $376 billion in Fannie and Freddie debt is held in Asia. In the past few days, officials at China's four largest publicly listed banks said that they held a combined $23.28 billion of debt issued or guaranteed by the U.S. lenders as of the end of June but that they had been reducing their stakes in Fannie and Freddie.
The outcome of the takeover for Fannie and Freddie stockholders is less certain. Once viewed as a safe bet, with a business model implicitly backed by the U.S. government, shares in the two companies have plummeted this year as concerns increased about their ability to continue functioning.
The government takeover halts dividend payments to stockholders and provides no guarantees that shares in the company will hold their value.
Paulson, in the CNBC interview, said that even though the final structure of Fannie and Freddie remains to be worked out, the terms of the government takeover will put the interests of taxpayers ahead of stockholders.
