Administration Decided in Late August That Takeover Was Needed
Tuesday, September 9, 2008
President Bush was told for the first time that the federal government would have to take dramatic action to rescue Fannie Mae and Freddie Mac during a secure videoconference with his top advisers from his ranch near Crawford, Tex., late last month, senior administration officials said yesterday.
Until that meeting, on Aug. 26, White House and Treasury officials were cautiously hopeful that they would not need to prop up the mortgage giants with the dramatic new powers bequeathed them by Congress in July. But after weeks of carefully scrutinizing the books, they finally concluded that the companies' finances had deteriorated so badly that government intervention was necessary.
"We were finally at the point where we saw what needed to be done -- and we laid it out that day," said a senior Treasury Department official familiar with the conversation with Bush.
According to senior officials, Bush left almost all the details of the plan to take over Fannie Mae and Freddie Mac to Treasury Secretary Henry M. Paulson Jr., who is a former Goldman Sachs investment banker. Paulson kept Bush and senior White House staff members informed of his thinking but was given wide latitude to plan and execute a massive takeover that could cost tens of billions of taxpayer dollars and effectively thrust the federal government into day-to-day management of the mortgage market.
The arrangement was characteristic of the way Bush has delegated to Paulson vast powers over economic policy that he kept for the White House during the tenures of his two previous Treasury secretaries. It also underscored the White House's pragmatic approach to the crisis over Fannie and Freddie's solvency, shedding its dislike of government intervention to try to keep the housing markets and the broader economy from unraveling.
"It's a government bailout, but we don't have a choice here," said Allan Hubbard, who formerly served as director of the president's National Economic Council. "There was an implicit government guarantee of these bonds, and these bonds are held by institutions and governments all over the world."
The senior Treasury official described the White House role: "They were basically saying do what you need to do -- this is about making the markets not worse than they were."
Democrats saw Bush's handling of the crisis as illustrative of a problematic hands-off approach to economic matters. "I don't think he had the faintest idea what was happening," said House Financial Services Committee Chairman Barney Frank (D-Mass.). "There was no real impetus in the administration to do anything about it, because their right wing was opposed to it."
Lawrence H. Summers, a Treasury secretary in the Clinton administration, said, "The next president is going to have to get very deeply and thoughtfully engaged in these issues." Still, he said, the administration was right to stage a "substantial intervention in these institutions to protect the financial system."
Many conservatives were unhappy with the implications of major government intervention in the financial markets. Peter J. Wallison, senior fellow at the American Enterprise Institute, called the takeover "very un-conservative" and said the government would have been better off placing the companies into a regular receivership.
"I don't think Bush and the White House had very much to say here, and I don't think they thought it through much," said Wallison, who served as White House counsel for President Ronald Reagan. "They thought [Paulson] would make the right decision, but he didn't."
But J.D. Foster, a senior fellow at the conservative Heritage Foundation, said Bush and his aides deserve credit for repeatedly proposing reforms of the two mortgage companies, although he acknowledged that some conservatives "might be frustrated they weren't more aggressive." Foster also noted that lawmakers of both parties resisted stronger actions.