Speaking to the Senate Banking Committee as part of the Humphrey-Hawkins testimony, Treasury Secretary Henry Paulson said government-sponsored enterprises (GSEs) need a strong regulator.

"Market stability and support for housing finance are among my highest priorities during this time of stress in our markets. Therefore, after consultations with the Federal Reserve, the Office of Federal Housing Enterprise Oversight (OFHEO), the Securities and Exchange Commission (SEC) and Congressional leaders, we are asking Congress, as it completes its work on a stronger GSE regulatory structure, to also enact a three-part plan to address the current situation," Paulson said.

Paulson said Fannie Mae and Freddie Mac pose systemic risks, adding that the GSE backstop was not prompted by a sudden decline in Fannie Mae and Freddie Mac.



The Treasury secretary went on to say that an appropriate size of GSE credit line is difficult to gauge and that there were no immediate plans by GSEs to access the credit line.

"Given the difficulty in determining the appropriate size of the credit line we are not proposing a particular dollar amount. Flexibility is the best means of increasing market confidence in the GSEs, and also the best means of minimizing taxpayer risk," Paulson said.

In a Q&A session preceding his testimony, Paulson addressed questions concerning the GSE bailout plan.

Paulson said that the unlimited credit line would provide flexibility to GSEs, and that he hopes the authority would not have to be used.

He told the senate committee that 18 months should be a sufficient period for the turmoil to end. "The treasury has no plans currently to invest in Fannie Mae and Freddie Mac," he said.

The proposal is aimed at increasing confidence in the GSEs and can address short-term and long-term issues, Paulson said. He added that limiting equity purchases and aid to GSEs would affect confidence and prove to be a self-defeating action in the end.

Paulson told the senate committee that confidence in Fannie Mae and Freddie Mac are essential to confidence in the U.S. markets.

An overarching regulator would give "great confidence" to the market, Paulson said, and confirmed that the unlimited line of credit will minimize the cost to taxpayers. Paulson added the current credit line is outdated.

Paulson said that Fannie Mae and Freddie Mac will have strong shares, but that it will take time for the market to evaluate the value of the shares. He vehemently denied any intentions of nationalizing Fannie Mae and Freddie Mac.

Paulson added that the Presidents Working Group recommendation is to strengthen infrastructure and that action on GSE's should be taken quickly. He commented that the President is highly committed to passing GSE reform and has also been a vocal supporter of the measures taken by the SEC.

When discussing the role that Treasury should play, Paulson noted that the Fed should have a regulatory role, while Treasury should maintain a consultative role.

Joining the testimony, Securities Exchange Commissioner Christopher Cox told the Senate Banking Committee that the SEC will prosecute those short-selling and spreading false rumours.

The SEC has invoked emergency rules on shor- selling Fannie Mae and Freddie Mac shares to remain in effect for 30-days. Cox said that the combination of short-selling and rumours spreading can be dangerous.

Cox told the committee that the SEC is getting better at prosecuting those who spread false rumours. He added that management should be held accountable to shareholders.

By Steve Stecyk, Sarah Sussman, Nancy Girgis