THE WALL STREET JOURNAL

Treasury Secretary Calls Fed’s Moves ‘Inflection Point’

WASHINGTON — Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that “the worst is likely to be behind us,” marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.

Mr. Paulson’s comments, made in an interview Tuesday, reflect Treasury’s view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats’ response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.

“There’s no doubt that things feel better today, by a lot, than they did in March,” Mr. Paulson said. He pointed to the Federal Reserve’s decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as “an inflection point” in the crisis.

The Treasury secretary was careful to predict that there would be further “bumps along the road,” and that it will take “some months longer” for the market distress to fully dissipate.

The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration’s response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.

Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.

House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush’s support for a more sweeping plan to enlarge the FHA’s authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.

But in threatening to veto the bill, the White House has upped the ante, reversing its earlier, more restrained reaction. It said the FHA program would constitute a “bailout” and also objected to a provision that would permanently increase the size of loans that Fannie Mae and Freddie Mac are allowed to purchase.

It is possible both sides could reach a compromise. Nonetheless, the move drew a sharp response from Rep. Barney Frank (D., Mass.), the bill’s main author. “It proves that ideology has triumphed in the White House over needed compassion and good economics,” said the congressman’s spokesman, Steven Adamske.

Despite his growing optimism, even Mr. Paulson has expressed some impatience with the pace at which the mortgage industry has implemented a Bush-backed plan to loosen terms for some borrowers before they lose their homes. On Tuesday, senior Treasury officials met for most of the day with some top mortgage firms and discussed ways to expedite loan modifications for struggling homeowners.