Paulson should consider receivership for Fannie, Freddie: report

(Reuters) - The Treasury Secretary could make greater progress toward a safer financial system by putting Fannie Mae (FNM.N) and Freddie Mac (FRE.N) into federal receivership, the Wall Street Journal said on Tuesday.

If the current law doesn't give Henry Paulson that power, he should seek it from Congress, the newspaper said in an editorial on its website.

The Treasury Department and the Federal Reserve on Sunday offered massive aid to bolster confidence in the companies and head off a potential financial market meltdown.

Together, the country's two biggest mortgage firms finance about $5 trillion in U.S. home loans, or about half of the total, so are too big to fail, the Wall Street Journal said.

"The question has been how to manage and regulate these monsters in a way that minimizes risks to the larger financial system and taxpayer," the editorial said.

Paulson wants Congress to give the government more power to rein in the two companies, including with a capital injection of preferred stock if required.

"This is progress, but it's not aggressive enough given the risks. He could make more progress more rapidly toward a safer financial system by putting the companies in federal receivership," the newspaper said.

Paulson could then appoint a prominent financial figure with bipartisan credibility as a receivership czar, with a mission to protect taxpayer interests.

A czar would have the power to replace the companies' management and directors, as well as give priority to taxpayers above the current private shareholders if the government does inject capital, the newspaper said.

Receivership does not mean the companies will fold overnight. They continue to hold trillions of dollars in mortgage assets, and they would continue to buy and package mortgages, the paper said.

But as a first priority, a receiver would be able to rein in their portfolios of mortgage-backed securities -- currently about $1.5 trillion -- that are a major source of their risk.

Later, as the mortgage crisis eases, the receiver could decide whether to wind the companies down, sell them in parts to the private sector, or let them continue in far more restricted form, the paper said.

The receivership option would also help Paulson get out ahead of the many other looming financial problems. Airline and car companies' failure may come in the future, the paper said.

Putting Fannie and Freddie in firmer hands now will reassure investors that at least one risk is being well managed, reducing public fear that the government is overwhelmed, the paper said.

(Reporting by Pratish Narayanan in Bangalore; editing by Neil Fullick)