What is Paulson Cooking Up For Fannie & Freddie?

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It was an amazing feat that Treasury Secretary Paulson was able to squeeze in his July 13 “GSE Initiatives” proposal for Fannie Mae (FNM) and Freddie Mac (FRE) into the Housing bill that President Bush signed July 30.

Despite Paulson’s continued assertion that Treasury has no plans to use its new powers, Morgan Stanley (MS) announced in a press release yesterday that it will “provide capital markets advice to support the Treasury’s responsibilities associated with its new authorities regarding Fannie Mae and Freddie Mac. As part of that assignment, Morgan Stanley will support the Treasury’s work to promote market stability and the availability of mortgage credit.” Chairman and CEO John Mack added: “Morgan Stanley is honored to have been asked to serve as financial advisor to the U.S. Treasury as it evaluates various alternatives for Fannie Mae and Freddie Mac.”

“Various alternatives” for Fannie and Freddie? A Wall Street Journal article says that Morgan Stanley is not going to “have access to Fannie and Freddie’s books and records other than what is publicly available.” If that’s the case, then why isn’t the staff at Treasury capable of handling this? The Journal reports that Paulson called Mack two weeks ago (before the Housing bill passed), and Morgan Stanley submitted a proposal to Paulson.

And Morgan Stanley is being so altruistic. According to the Journal, not only will Morgan Stanley provide Robert Scully’s services to Treasury for free except for $95,000 toward expenses, but the firm “is giving up any involvement it has had advising Fannie and Freddie as part of this new assignment.” Ask yourself: Would you give up two clients as well as an executive’s billable time for the government for free? Sorry, but it just doesn’t pass the sniff test.

Perhaps Mr. Scully will get a cube at Treasury next to Ken Wilson. He’s the Chairman of the Financial Institutions Group at Goldman Sachs (GS), who advises clients on capital raisings and deals, such as Bank of America’s (BAC) takeover of Countrywide Financial. Sounds like an in-demand kind of job right now, yet he too is working for free at the Treasury until January.

Involving powerful Wall Street players in the Fannie and Freddie analysis only serves to sow the seeds of doubt to Paulson’s contention that he won’t be using his new powers. After the news was released last night, shares of Fannie and Freddie declined in after hours trading.

Related Post: “Former SEC Chairman Levitt on the Dangers of The Paulson Doctrine”

Disclosure: Long FRE

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