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Fannie and Freddie key to housing, markets: Paulson

NEW YORK (Reuters) - Treasury Secretary Henry Paulson said on Tuesday shoring up housing finance giants Fannie Mae and Freddie Mac was crucial to ending the slide in housing prices and easing the strains in financial markets.

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In remarks at the New York Public Library, Paulson cautioned that working through market turmoil will take time and reiterated his view that Congress will pass a federal backstop plan for the two government-sponsored enterprises this week.

“Our markets won’t make progress in a straight line and we should expect additional bumps in the road,” Paulson said. “Until the housing market stabilizes further, we should expect some continued stresses in our financial markets,” he added.

Paulson said restoring confidence in Fannie FNM.N and Freddie FRE.N is crucial to stabilizing markets rattled by a year-old credit crunch and a sharp fall in home values.

Shares in the two companies have plummeted this year on growing fears they may not have enough capital.

“Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions,” Paulson said.

“Now more than ever, we need Fannie and Freddie out there, financing mortgages,” Paulson added.

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After a recent collapse in their share prices, Paulson proposed expanding the companies’ access to government loans and said the government should stand ready to buy equity in the two if needed.

The non-partisan Congressional Budget Office said on Tuesday that the plan has the potential to cost American taxpayers $25 billion over the next two fiscal years. A Treasury spokeswoman declined to comment on the figure, but Paulson has said he does not expect the two institutions to need government funds.

“We certainly have no plans right now to put capital in,” Paulson told Bloomberg Television in an interview.

Congress is considering the measures this week as part of a broader housing rescue bill, which also contains a $4 billion provision for government grants to communities hurt by the housing crisis. Paulson did not repeat a White House threat to veto the bill if it contains those provisions, but called them “divisive” and “extraneous”.

HEDGE FUND, NON-BANK FAILURES

Paulson also said market turmoil in recent weeks has underscored the need to move more quickly toward an optimal regulatory structure that better addresses risk posed by non-depository institutions, such as Wall Street investment banks and hedge funds. He called for a stronger infrastructure in markets that would help contain the impact from a failing institution.

“We also need additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system.”

Paulson first broached the topic of a new system for unwinding large non-bank institutions in London earlier this month, but did not include hedge funds as part of this process.

“Looking beyond today’s market challenges, we need to get to the point where large complex financial institutions are not perceived to be too big or too interconnected to fail,” Paulson said.

Additional reporting by Mark Felsenthal, writing by David Lawder; Editing by Tom Hals

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