Greenspank trashes Fannie and Freddie in his coffee klatch tonight:
online.wsj.com
Greenspan Criticizes U.S. Subsidies
As a Phantom Screen Against Risk
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- In comments likely to further charge an already contentious debate, Federal Reserve Chairman Alan Greenspan said government support for mortgage agencies, such as Fannie Mae and Freddie Mac, might be leading investors to underestimate the risk of dealing in their securities.
Fannie Mae and Freddie Mac are private corporations that operate under government charters. As such, they enjoy several privileges, including access to a never-used line of credit with the Treasury Department and exemption from some securities regulations that apply to other publicly traded companies.
Mr. Greenspan has criticized this implicit government support as a subsidy to housing that distorts the economy's allocation of resources. But in a speech Monday night, he went further, suggesting that subsidy might also be causing the risk in their derivatives transactions to be understated, though he didn't say that had actually happened.
The perception that the U.S. backs the government-sponsored enterprises -- or GSEs -- could encourage investors "to apply less vigorously some of the risk controls that they apply to manage their over-the-counter derivatives exposures," he said in a speech, via satellite, to the Institute of International Finance. The association of global financial institutions includes some of Fannie Mae's and Freddie Mac's critics.
Fannie Mae and Freddie Mac buy mortgages from banks and other lenders and repackage some loans as mortgage-backed securities that are sold to investors such as pension funds. The two also are major holders of those same mortgage-backed securities, issue billions of dollars of their own bonds to finance those holdings and hedge their interest-rate risk in the bond and derivatives markets.
The agencies and their backers say that by developing an active secondary market in mortgage-backed debt they have helped hold down borrowing costs, increasing home affordability and ownership. Critics, however, say their size and complexity could cloak unknown risks for both investors and taxpayers if the companies get into trouble.
Most of Mr. Greenspan's speech extolled the benefits of derivatives to the economy. He acknowledged that concerns have been raised about the risks assumed by Fannie Mae's and Freddie Mac's counterparties -- the mainly large, sophisticated investors with whom the agencies trade -- due to the mortgage companies' hedging activity, but he said "counterparties can manage this risk effectively" through existing risk-management tools. "The broader risks for financial markets and the economy result from the perception of government support for these corporations and the resulting implicit subsidization of GSEs," he said.
Mr. Greenspan waded into the debate over the GSEs in 2000, when Rep. Richard Baker (R., La.) introduced a bill that would curb GSEs' privileges and toughen their regulation. The Clinton Treasury endorsed major elements of the plan. In a letter to Mr. Baker in May of that year, Mr. Greenspan wrote, "Subsidies accorded to GSEs are, of necessity, at the expense of other federal or private-sector initiatives." Those efforts to rein in the GSEs failed in part on account of their aggressive lobbying.
But concern has been rekindled by the collapse of Enron Corp. and increased investor mistrust of financially complex companies. Some critics have likened the mortgage agencies to Enron because of their complexity, heavy use of derivatives and the extent to which they dominate the mortgage market.
The companies reject the comparisons, contending they have exceptionally rigorous and stringent capital standards and risk controls as well as extensive disclosure. Nonetheless, a bill in Congress would require them to provide the same financial disclosure that other publicly traded companies do.
Wonder if this just occurred to him, or if he got one too many shots of espresso in his Latte'? |
