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HIGHLIGHTS: Bernanke, Paulson, Cox respond to Senate questions

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and U.S. Securities and Exchange Commission Chairman Christopher Cox discussed their recent actions to shore up support for Fannie Mae and Freddie Mac before the Senate Banking Committee on Tuesday.

Following are highlights from the question and answer portion of their appearance before lawmakers, including some comments from key legislators:

COX ON SYSTEMIC RISK OF CURRENT GSE MODEL:

“I would hope that in addition to what we’re doing right now -- which is in extremis -- we keep in mind the end state that we’re trying to achieve and we would quickly learn the lessons of the moment, which include the fact that the systemic risk that has been located here in part because of the perception of government embrace of them, that that would no longer be the case in the future. I think the combination of socialized risk and privatized profit is a very suspect model.”

PAULSON ON WHETHER TREASURY AND FED SHOULD BE CO-GSE

REGULATORS:

“I don’t see a role for Treasury in the consultative regulatory process. We’d have a strong independent regulator. And then the Fed would have a consultative role, as we are suggesting, more broadly across the whole economy.”

BERNANKE ON WHETHER FED SHOULD SUPERSEDE OFHEO:

“No. The most valuable thing would be for us to be in a consulting, discussion, information-exchange type of relationship.”

SENATE BANKING COMMITTEE CHAIRMAN CHRIS DODD ON PROPOSED GSE

OVERSIGHT ROLE FOR FED:

“The bill that’s pending now in resolution between the house and the senate ... establishes a very strong regulator for the GSEs.

There are those, I’m included here, that would be concerned about in a sense substituting that very strong regulator, and I say this respectfully, to the Chairman of the Federal Reserve.”

DODD ON COMBINING MORE AUTORITY UNDER THE FED:

“I’m uneasy about what we’re trying to achieve here. I’m not sure I’m want to get to a Financial Services Administration model that Great Britain has.”

PAULSON ON IMPORTANCE OF GSES AND THEIR SECURITIES:

“These entities are essential right now to the housing markets...they’re essential to homeowners. They’ve got securities all over the world. The confidence in their securities are essential to confidence in our capital markets.”

“I do not buy into the proposition that these institutions aren’t viable, these institutions are playing a very major role right now in the economy.”

PAULSON SAYS CURRENT REGULATORY STRUCTURE OUTDATED:

“The way the Fed and the SEC have come together underscores a very important point. We have a regulatory structure, in my view, that is outmoded in this country. It’s not just that we have a world-class regulator with all the necessary powers for the GSEs, we have a regulatory structure that doesn’t work the way we like it to work for our financial system today.”

PAULSON ON WORKING WITH MANAGEMENT OF THE GSES:

“My experience with management has been a constructive experience. I talked directly with the Freddie Mac board, I did not talk to the Fannie Mae board but I’ve had very good discussions with them. I’m not looking for scapegoats and I’m grateful for the service board members are providing and that management is providing.”

PAULSON ON LIKELIHOOD GSE CREDIT LINE WILL BE USED:

“If you’ve got a squirt gun in your pocket, you may have to take it out. If you’ve got a bazooka and people know you’ve got it, you may not have to take it out. You’re not likely to take it out. I just say that by having something that’s unspecified, it will increase confidence and by increasing confidence it will greatly reduce the likelihood it will ever be used.”

PAULSON ON WHETHER TREASURY WOULD DENY GSE LOAN:

“We may say no or we may say these are the terms that we think. But I think what you are going to find is that its got to be at our discretion. I was very clear with them when we talked to them over the weekend that this wasn’t going to be something that we were going to be enforcing on them, this would be something that we’d have to work on together and it would be done mutually.”

PAULSON ON WHAT MIGHT TRIGGER TREASURY ASSISTANCE TO GSES:

“I think just for that, Senator, you’ve laid out why it would be self-defeating to start putting limitations on that. So I think the way I would see it and the way I would like it to work is temporary, and (with) the understanding you would have with me -- although we wouldn’t have legislative requirements -- this would be something I would talk about with the leadership of this committee and committees in the House, and it would be if needed.”

BERNANKE ON WHO IS LEAD DECISION MAKER FOR GSE INTERVENTION:

“When a policy has potential fiscal implications it’s far better to have the fiscal authority make that decision. So I think it’s really appropriate for the Treasury Secretary, in consultation with the Congress, and not the Federal Reserve Chairman, to make those decisions.”

PAULSON ON SIZE OF POTENTIAL GSE CREDIT LINE:

“Why are we asking for an unspecified amount? The reason we are is I have the same objective that you have. What I would like to do is provide stability in the market and do so at the least cost to the taxpayer. And I see it very clearly that the way to minimize the chance that this facility will ever be called upon will be to take any questions off the table and provide as much flexibility as possible.”

“As I’ve said, since we believe that the right thing to do is to keep these institutions in their current form, the question which I’m answering is that this is a backup facility, -- hopefully will would never be used -- and if you want to maximize the chances it will never be used, you would have maximum authority for temporary period. We’re asking for it for a temporary period of time.”

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