A quote from Poole:
But "for those who believe that a GSE crisis is unthinkable in the future I suggest a course in economic history," he concluded.
Hawkish words about GSE's, but do they really mean it ?
By Isabelle Lindenmayer
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Failure to enact reform of government-sponsored
enterprises Freddie Mac (FRE) and Fannie Mae (FNM) would be a potential source
of financial crisis, Federal Reserve Bank of St. Louis Federal Reserve Bank
President William Poole said Wednesday.
"Although there is pending legislation in Congress, a major restructuring of
these firms and genuine reform appear to be as distant as ever," Poole said in
prepared remarks to the Charter Financial Analysts of St. Louis in Brentwood,
Mo.
That said, the Fed official said he remains hopeful that Congress will
eventually pass meaningful legislation to reform the the congressionally
chartered giant mortgage lenders, adding that private-sector financial firms
should have an "intense interest" in GSE reform legislation.
"I believe that many risk managers simply accept that GSEs are effectively
backstopped by the Federal Reserve and the federal government without ever
thinking through how such implicit guarantees would actually work in a crisis,"
Poole warned.
"The view seems to be that someone, somehow, would do what is necessary in a
crisis," Poole said.
Rather, three essential reforms are required to eliminate GSEs' threat to
financial stability: a limit on their portfolio growth, an increase in their
minimal required capital, and satisfactory bankruptcy legislation, he said.
Poole's prepared text didn't address the outlook for the U.S. economy or
monetary policy. He will be a voting member of the policy-setting Federal Open
Market Committee this year.
In his speech, Poole reiterated the case for turning the mortgage giants into
private firms.
"If they bolster their capital, they can function perfectly well as purely
private firms," he said.
Citing a study conducted by economists at the Board of Governors, Poole
emphasized that privatizing Fannie Mae and Freddie Mac wouldn't raise mortgage
rates paid by borrowers.
The Fed official also made the case for limiting Fannie Mae and Freddie Mac's
role in market segments beyond conforming home mortgages.
In order to constrain operations of the GSEs to "areas with a clear public
purpose," Poole suggested either an end to the implied federal guarantee behind
the two mortgage giants, or placing restrictions on the size of their owned
portfolios.
"For them to extend their operations into market segments already well served
by existing private firms will not enhance the efficiency of mortgage markets
or reduce costs to mortgage borrowers," Poole said.
In addition, Congress should strengthen the powers of the Office of Federal
Housing Enterprise Oversight, the government agency tasked with regulating the
two mortgage giants, Poole noted.
All that said, Poole did state that he doesn't believe a GSE crisis to be
imminent.
But "for those who believe that a GSE crisis is unthinkable in the future I
suggest a course in economic history," he concluded. |
