Crisis Turns Free Marketeers into Regulators

By Reuters -  |  Posted 2008-08-08 Print this article Print

U.S. Treasury Secretary Henry Paulson and policy-makers have converted from proponents of hands-off government regulators to occasional interventionists given the state of the economy.

WASHINGTON (Reuters) - Worn down by a deepening housing crisis, U.S. Treasury Secretary Henry Paulson and other Washington policy-makers have converted from proponents of hands-off government to reluctant interventionists ready to extend the occasional, expensive helping hand.

It was not the smoothest transition for Paulson, a Goldman Sachs veteran who was seen as a strong and knowledgeable bridge between Washington and Wall Street when he took up his cabinet post in July 2006.

Many of his former financial market colleagues welcomed his appointment because they believed he would work to relax some rules put in place after accounting scandals took down companies such as Enron and WorldCom earlier in the decade.

Instead, a year of credit market turmoil has exposed gaping holes in supervision, and Paulson's legacy may be that he laid the groundwork for the biggest overhaul of financial regulation since the aftermath of the Great Depression in the 1930s.

When markets seized up one year ago, Paulson annoyed some on Wall Street who thought he underestimated how quickly problems in the subprime mortgage market could infect the global economy. Last month, he incurred the wrath of some fellow Republicans in Congress, who likened Paulson's pledge to backstop mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) to socialism.

In Paulson's own words, he was simply "playing the hand that I have been dealt" when he agreed to offer an undefined credit line and buy stock in Fannie Mae and Freddie Mac to bolster the two government-sponsored enterprises.

However, he was able to engineer bipartisan agreement on a rescue, with presidential elections just months away, underlining the pragmatic approach Paulson brought to the Treasury from his three-decade tenure on Wall Street.

"I would rather not have been in the position of asking for extraordinary authorities to support the GSEs," Paulson said on July 31. "We saw a clear need to strengthen Fannie and Freddie's ability to continue to play their important role in financing mortgages and in our capital markets more broadly."


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