We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon
Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
here is your 1 sentence bottom line of what shall be in time we have yet to experience
"I think this is a baby financial mania," says David Hinman, a portfolio manager at Los Angeles investment firm Ares Management LLC, referring to credit derivatives. "Like a lot of financial manias, it tends to end with some casualties."
The Cryptocurrency mania will grow and grow until the Market cap becomes a really big and meaningful number.... and then there will be a Epic Bear Market..... and all the wealth destroyed in the crypto's will force all the players, hedge funds and others to sell what they can sell to cover there losses.
The cryptocurrencies are not going to cause a problem this month.... but it is the equivalent about learning about the housing bubble and the CDS /CDO Incredible growth so one can be aware that it will be causing changes in the future....
kind of like knowing in 1943-1944 that we were working on the atomic bomb as it would change the world completely in a year or two. ------------------------------------
how ironic....... when we moved to The wee -south end of the woodlands in early 1992, the Hardy Toll road shot you on a nice highspeed toll road right out of downtown Houston and it ended and merged with I 45..... which was a nice 5 or 6 lanes right there at the time.... it was a quick 30 seconds on I-45 and we got off at Rayford SAWDUST road..... you just stayed on Sawdust making a severe left at the 3rd light and followed SAWDUST until we reached Grogan's Point ..... the southernmost tip of the Woodlands that was by Spring creek which was the border line of Montgomery and Harris county.
XOM had moved all their Florham park NJ operations ....both domestic and international and consolidated the whole deal in Houston and the HQ which was in Manhattan...in the Exxon building.... Standard Oil was originally in 26 Broadway... back in 1890 or 1900 or so..........
as it turns out that was such a pleasant area, that as the crow flies. Exxon-Mobil built their entire campus 1 to 2 miles south of there just on the other side of Spring Creek.
----------------------
Now there is a reason that the post you are responding too is so long...... it's designed that way on purpose...
I's what is know as a literary device where there is an allegory / a metaphor and I am not so subtly demonstrating something that you have to sit back and think about for it to make sense..... The answer/ and the prediction of what has yet to come but shall at the annointed hour is right in there, but you have to read it with the right kind of perception......
As the glimmer twins..... Jager and Richards wrote.... and then recorded with the stones in the the late 1960's...
You can't always get what you want.... but if you try some time , you GET WHAT YOU NEED
I am showing you one of the Ground Zeros of the next Global Asset collapse is at...... and It's a little way down the road...... The First time that CDS I wrote about Credit default swaps was this past week 12 years ago and no one knew anything about them........ there have been books written one by Michael Lewis that said only 25 people in the entire world knew about the CDS/CDO supernova and it's inextricable link to the housing market bubble.....
My good friend Joe Sekely, who says that I am a financial genius.... which I am most certainly not..... I can not even walk and chew gum at the same time...... but you know ...... once in a while even a blind squirrel finds an acorn.
a cornerstone of Bank risk managment is to have strict lines as to how much exposure and credit lines you have to any counterparty in FX, Bond, derivatives and an banking transaction with other firms.
that was mandatory at Citi and Chase , Chemical, Banker's trust, Manufacturers Hanover, JPM, GS, MS, LEH, Bear Sterns.... Barclays, RBS, UBS, Deutsche, Solomon HSBC, etc......
A 9 Fold Increase in Credit-Swaps Derivatives in 3 years, That's substantive. this article illustrates a potential systemic weakness in the Financial System.
------------------------------------------------------- Fed, Will Meet Over Derivatives August 25, 2005
By HENNY SENDER, MICHAEL MACKENZIE and RAMEZ MIKDASHI Staff Reporters of THE WALL STREET JOURNAL August 25, 2005; Page C3
The Federal Reserve Bank of New York will meet with Wall Street banks next month to discuss the still relatively opaque market for credit derivatives.
The market is a young but rapidly growing one where traders and investors use the derivatives to buy and sell protection against defaults. Trading volumes have soared, but back-office functions needed to make sure trades get completed haven't kept up with that growth.
It is these so-called settlement issues that the New York Fed wants to discuss with the bankers on Sept. 15. New York Fed President Timothy Geithner sent a letter to dealers on Aug. 12 inviting them to meet on "how best to address a range of important issues in the credit-derivatives market."
While those issues appear technical, they are essential to keep losses from snowballing into more systemic problems when the markets are volatile.
In May, for example, a downgrade of General Motors Corp. debt sparked violent moves in the market for credit derivatives and at least paper losses for Wall Street firms and the hedge funds on the other side of some trades. Those events led to calls for greater discipline and monitoring. More recently, problems surfaced when car-parts company Collins & Aikman Corp. filed for bankruptcy protection. A daisy chain of trades made it hard for many in the market to figure out who their ultimate counterparty was.
According to the International Swaps and Derivatives Association, the notional value of credit-default swaps outstanding reached $8.4 trillion at the end of 2004, a ninefold increase in just three years.
The New York Fed invited 14 banks from the U.S. and abroad but declined to name them. The credit-derivatives market is dominated by a handful of banks, including J.P. Morgan & Chase Co., Deutsche Bank AG, Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc. Goldman Sachs and J.P. Morgan declined to comment, while other banks couldn't be reached for comment.
Hedge funds account for much of the recent surge in credit-derivatives activity. Banks welcome the funds as trading partners, but the funds sometimes move out of trades -- "assign" them -- without telling the bank that sold them the credit-derivative contract that their counterparty has changed. This makes it harder for other participants to know whether their positions are properly hedged.
Questions about the rising backlog of trades that haven't been settled have been with the market for some time. Indeed, the issues the Fed raises in its letter have been flagged by regulators in the United Kingdom and most recently in a report last month from the Counterparty Risk Management Group led by Gerald Corrigan, a former New York Fed president.
Federal Reserve Chairman Alan Greenspan and others have praised the role of the derivatives market in diluting financial risk, although the central-bank chief did warn in a speech in May of the potential risks to the economy if the use of derivatives isn't properly managed.
Banks and even some hedge funds say they welcome the Fed's initiative because it will help them focus on how to beef up their own back-office functions.
"We've always thought issues surrounding confirmations, settlements and assignments were really important, and have ourselves invested a great deal of time, money, people and technology to make sure that we've got this right," said Stephen Siderow, president of BlueMountain Capital Management, a hedge-fund manager overseeing investments of $2.7 billion. "We think these kinds of conversations between dealers and regulators can be very valuable."
Slices of Risk How a Formula Ignited Market That Burned Some Big Investors
Credit Derivatives Got a Boost From Clever Pricing Model; Hedge Funds Misused It Inspiration: Widowed Spouses
By MARK WHITEHOUSE Staff Reporter of THE WALL STREET JOURNAL September 12, 2005; Page A1
When a credit agency downgraded General Motors Corp.'s debt in May, the auto maker's securities sank. But it wasn't just holders of GM shares and bonds who felt the pain.
Like the proverbial flap of a butterfly's wings rippling into a tornado, GM's woes caused hedge funds around the world to lose hundreds of millions of dollars in other investments on behalf of wealthy individuals, institutions like university endowments -- and, via pension funds, regular folk.
All this traces back, in a sense, to a day eight years ago when a Chinese-born New York banker got to musing about love and death -- specifically, how people tend to die soon after their spouses do. Therein lies a tale of how a statistician unknown outside a small coterie of finance theorists helped change the world of investing.
The banker, David Li, came up with a computerized financial model to weigh the likelihood that a given set of corporations would default on their bond debt in quick succession. Think of it as a produce scale that not only weighs a bag of apples but estimates the chance that they'll all be rotten in a week.
The model fueled explosive growth in a market for what are known as credit derivatives: investment vehicles that are based on corporate bonds and give their owners protection against a default. This is a market that barely existed in the mid-1990s. Now it is both so gigantic -- measured in the trillions of dollars -- and so murky that it has drawn expressions of concern from several market watchers. The Federal Reserve Bank of New York has asked 14 big banks to meet with it this week about practices in the surging market.
The model Mr. Li devised helped estimate what return investors in certain credit derivatives should demand, how much they have at risk and what strategies they should employ to minimize that risk. Big investors started using the model to make trades that entailed giant bets with little or none of their money tied up. Now, hundreds of billions of dollars ride on variations of the model every day.
"David Li deserves recognition," says Darrell Duffie, a Stanford University professor who consults for banks. He "brought that innovation into the markets [and] it has facilitated dramatic growth of the credit-derivatives markets."
The problem: The scale's calibration isn't foolproof. "The most dangerous part," Mr. Li himself says of the model, "is when people believe everything coming out of it." Investors who put too much trust in it or don't understand all its subtleties may think they've eliminated their risks when they haven't.
The story of Mr. Li and the model illustrates both the promise and peril of today's increasingly sophisticated investment world. That world extends far beyond its visible tip of stocks and bonds and their reactions to earnings or economic news. In the largely invisible realm of derivatives -- investment contracts structured so their value depends on the behavior of some other thing or event -- credit derivatives play a significant and growing role. Endless trading in them makes markets more efficient and eases the flow of money into companies that can use it to grow, create jobs and perhaps spread prosperity.
But investors who use credit derivatives without fully appreciating the risks can cause much trouble for themselves and potentially also for others, by triggering a cascade of losses. The GM episode proved relatively minor, but some experts say it could have been worse. "I think this is a baby financial mania," says David Hinman, a portfolio manager at Los Angeles investment firm Ares Management LLC, referring to credit derivatives. "Like a lot of financial manias, it tends to end with some casualties."
Mr. Li, 42 years old, began his journey to this frontier of capitalist innovation three decades ago in rural China. His father, a police official, had moved the family to the countryside to escape the purges of Mao's Cultural Revolution. Most children at the young Mr. Li's school didn't go past the 10th grade, but he made it into China's university system and then on to Canada, where he collected two master's degrees and a doctorate in statistics.
In 1997 he landed on the New York trading floor of Canadian Imperial Bank of Commerce, a pioneer in the then-small market for credit derivatives. Investment banks were toying with the concept of pooling corporate bonds and selling off pieces of the pool, just as they had done with mortgages. Banks called these bond pools collateralized debt obligations.
They made bond investing less risky through diversification. Invest in one company's bonds and you could lose all. But invest in the bonds of 100 to 300 companies and one loss won't hurt so much.
The pools, however, didn't just offer diversification. They also enabled sophisticated investors to boost their potential returns by taking on a large portion of the pool's risk. Banks cut the pools into several slices, called tranches, including one that bore the bulk of the risk and several more that were progressively less risky.
Say a pool holds 100 bonds. An investor can buy the riskiest tranche. It offers by far the highest return, but also bears the first 3% of any losses the pool suffers from any defaults among its 100 bonds. The investor who buys this is betting there won't be any such losses, in return for a shot at double-digit returns.
Alternatively, an investor could buy a conservative slice, which wouldn't pay as high a return but also wouldn't face any losses unless many more of the pool's bonds default.
Investment banks, in order to figure out the rates of return at which to offer each slice of the pool, first had to estimate the likelihood that all the companies in it would go bust at once. Their fates might be tightly intertwined. For instance, if the companies were all in closely related industries, such as auto-parts suppliers, they might fall like dominoes after a catastrophic event. In that case, the riskiest slice of the pool wouldn't offer a return much different from the conservative slices, since anything that would sink two or three companies would probably sink many of them. Such a pool would have a "high default correlation."
But if a pool had a low default correlation -- a low chance of all its companies stumbling at once -- then the price gap between the riskiest slice and the less-risky slices would be wide.
This is where Mr. Li made his crucial contribution. In 1997, nobody knew how to calculate default correlations with any precision. Mr. Li's solution drew inspiration from a concept in actuarial science known as the "broken heart": People tend to die faster after the death of a beloved spouse. Some of his colleagues from academia were working on a way to predict this death correlation, something quite useful to companies that sell life insurance and joint annuities.
"Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve," says Mr. Li. "Default is like the death of a company, so we should model this the same way we model human life."
His colleagues' work gave him the idea of using copulas: mathematical functions the colleagues had begun applying to actuarial science. Copulas help predict the likelihood of various events occurring when those events depend to some extent on one another. Among the best copulas for bond pools turned out to be one named after Carl Friedrich Gauss, a 19th-century German statistician.
Mr. Li, who had moved over to a J.P. Morgan Chase & Co. unit (he has since joined Barclays Capital PLC), published his idea in March 2000 in the Journal of Fixed Income. The model, known by traders as the Gaussian copula, was born.
"David Li's paper was kind of a watershed in this area," says Greg Gupton, senior director of research at Moody's KMV, a subsidiary of the credit-ratings firm. "It garnered a lot of attention. People saw copulas as the new thing that might illuminate a lot of the questions people had at the time."
To figure out the likelihood of defaults in a bond pool, the model uses information about the way investors are treating each bond -- how risky they're perceiving its issuer to be. The market's assessment of the default likelihood for each company, for each of the next 10 years, is encapsulated in what's called a credit curve. Banks and traders take the credit curves of all 100 companies in a pool and plug them into the model.
The model runs the data through the copula function and spits out a default correlation for the pool -- the likelihood of all of its companies defaulting on their debt at once. The correlation would be high if all the credit curves looked the same, lower if they didn't. By knowing the pool's default correlation, banks and traders can agree with one another on how much more the riskiest slice of the bond pool ought to yield than the most conservative slice.
"That's the beauty of it," says Lisa Watkinson, who manages structured credit products at Morgan Stanley in New York. "It's the simplicity."
It's also the risk, because the model, by making it easier to create and trade collateralized debt obligations, or CDOs, has helped bring forth a slew of new products whose behavior it can predict only somewhat, not with precision. (The model is readily available to investors from investment banks.)
The biggest of these new products is something known as a synthetic CDO. It supercharges both the returns and the risks of a regular CDO. It does so by replacing the pool's bonds with credit derivatives -- specifically, with a type called credit-default swaps.
The swaps are like insurance policies. They insure against a bond default. Owners of bonds can buy credit-default swaps on their bonds to protect themselves. If the bond defaults, whoever sold the credit-default swap is in the same position as an insurer -- he has to pay up.
The price of this protection naturally varies, costing more as the perceived likelihood of default grows.
Some people buy credit-default swaps even though they don't own any bonds. They buy just because they think the swaps may rise in value. Their value will rise if the issuer of the underlying bonds starts to look shakier.
Say somebody wants default protection on $10 million of GM bonds. That investor might pay $500,000 a year to someone else for a promise to repay the bonds' face value if GM defaults. If GM later starts to look more likely to default than before, that first investor might be able to resell that one-year protection for $600,000, pocketing a $100,000 profit.
Just as investment banks pool bonds into CDOs and sell off riskier and less-risky slices, banks pool batches of credit-default swaps into synthetic CDOs and sell slices of those. Because the synthetic CDOs don't contain any actual bonds, banks can create them without going to the trouble of purchasing bonds. And the more synthetic CDOs they create, the more money the banks can earn by selling and trading them.
Synthetic CDOs have made the world of corporate credit very sexy -- a place of high risk but of high potential return with little money tied up.
Someone who invests in a synthetic CDO's riskiest slice -- agreeing to protect the pool against its first $10 million in default losses -- might receive an immediate payment of $5 million up front, plus $500,000 a year, for taking on this risk. He would get this $5 million without investing a dime, just for his pledge to pay in case of a default, much like what an insurance company does. Some investors, to prove they can pay if there is a default, might have to put up some collateral, but even then it would be only 15% or so of the amount they're on the hook for, or $1.5 million in this example.
This setup makes such an investment very tempting for many hedge-fund managers. "If you're a new hedge fund starting out, selling protection on the [riskiest] tranche and getting a huge payment up front is certainly something that's going to attract your attention," says Mr. Hinman of Ares Management. It's especially tempting given that a hedge fund's manager typically gets to keep 20% of the fund's winnings each year.
Synthetic CDOs are booming, and largely displacing the old-fashioned kind. Whereas four years ago, synthetic CDOs insured less than the equivalent of $400 billion face amount of U.S. corporate bonds, they will cover $2 trillion by the end of this year, J.P. Morgan Chase estimates. The whole U.S. corporate-bond market is $4.9 trillion.
Some banks are deeply involved. J.P. Morgan Chase, as of March 31, had bought or sold protection on the equivalent of $1.3 trillion of bonds, including both synthetic CDOs and individual credit-default swaps. Bank of America Corp. had bought or sold about $850 billion worth and Citigroup Inc. more than $700 billion, according to the Office of the Comptroller of the Currency. Deutsche Bank AG, whose activity the comptroller doesn't track, is another big player.
Much of that money is riding on Mr. Li's idea, which he freely concedes has important flaws. For one, it merely relies on a snapshot of current credit curves, rather than taking into account the way they move. The result: Actual prices in the market often differ from what the model indicates they should be.
Investment banks try to compensate for the shortcomings of the model by cobbling copula models together with other, proprietary methods. At J.P. Morgan, "We're not stupid enough to believe [the model] is omniscient," said Andrew Threadgold, head of market risk management. "All risk metrics are flawed in some way, so the trick is to use a lot of different metrics." Bank of America and Citigroup representatives said they use various models to assess risk and are constantly working to improve them. Deutsche Bank had no comment.
As with any model, forecasts investors make by using the model are only as good as the inputs. Someone asking the model to indicate how CDO prices will act in the future, for example, must first offer a guess about what will happen to the underlying credit curves -- that is, to the market's perception of the riskiness of individual bonds over several years. Trouble awaits those who blindly trust the model's output instead of recognizing that they are making a bet based partly on what they told the model they think will happen. Mr. Li worries that "very few people understand the essence of the model."
Consider the trade that tripped up some hedge funds during May's turmoil in GM securities. It involved selling insurance on the riskiest slice of a synthetic CDO and then looking to the model for a way to hedge the danger that the default risk would increase. Using the model, investors calculated that they could offset that danger by buying a double dose of insurance on a more conservative slice.
It looked like a great deal. For selling protection on the riskiest slice -- agreeing to pay as much as $10 million to cover the pool's first default losses -- an investor would collect a $3.5 million upfront payment and an additional $500,000 yearly. Hedging the risk would cost the investor a mere $415,000 annually, the price to buy protection on a $20 million conservative piece.
But the model's hedge assumed only one possible future: one in which the prices of all the credit-default swaps in the synthetic CDO moved in sync. They didn't. On May 5, while the outlook for most bond issuers stayed about the same, two got slammed: GM and Ford Motor Co., both of which Standard & Poor's downgraded to below investment grade. That event caused a jump in the price of protection on GM and Ford bonds. Within two weeks, the premium payment on the riskiest slice of the CDO, the one most exposed to defaults, leapt to about $6.5 million upfront.
Result: An investor who had sold protection on the riskiest slice for $3.5 million had a paper loss of nearly $3 million. That's because if the investor wanted to get out of the investment, he would have to buy a like amount of insurance from somebody else for $6.5 million, or $3 million more than he was getting.
The simultaneous investment in the conservative slice proved an inadequate hedge. Because only GM and Ford saw their default risk soar, not the rest of the bond world, the pricing of the more conservative slices of the pool didn't rise nearly as much as the riskiest slice. So there wasn't much of an offsetting profit to be made there by reselling that insurance.
This wasn't really the fault of the model, which was designed mainly to help price the tranches, not to make predictions. True, the model had assumed the various credit curves would move in sync. But it also allowed for investors to adjust this assumption -- an option that some, wittingly or not, ignored.
Because numerous hedge funds had made the same credit-derivatives bet, the turmoil they faced spilled over into stock and bond markets. Many investors worried that some hedge funds might have to dump assets to cover their losses, so they sold, too. (Some hedge funds also suffered from a separate bad bet, which relied on GM's bond and stock prices moving in tandem; it went wrong when GM shares rallied suddenly as investor Kirk Kerkorian said he would bid for GM shares.)
GLG Credit Fund told its investors it lost about 14.5% in the month of May, much of that on synthetic CDO bets. Writing to investors, fund manager Jean-Michel Hannoun called the market reaction to the GM and Ford credit downgrades too improbable an event for the hedge fund's risk model to capture. A GLG spokesman declines to comment.
The credit-derivatives market has since bounced back. Some say this shows that the proliferation of hedge funds and of complex derivatives has made markets more resilient, by spreading risk.
Others are less sanguine. "The events of spring 2005 might not be a true reflection of how these markets would function under stress," says the annual report of the Bank for International Settlements, an organization that coordinates central banks' efforts to ensure financial stability. To Stanford's Mr. Duffie, "The question is, has the market adopted the model wholesale in a way that has overreached its appropriate use? I think it has."
Mr. Li says that "it's not the perfect model." But, he adds: "There's not a better one yet."
Write to Mark Whitehouse at mark.whitehouse@wsj.com1
I am pretty sure that the problems with credit default derivatives especially the inability to accurately assess counter-party risk and counter party solvency are going to be a major factor in the next financial system blow up. The timing of this will probably coincide with an upcoming quick 275- 300 basis point sprint in the 10 year yield.
The bottom line is that with the daisy chaining of these sales and resales of the credit default protection contracts. Some players will end up overextended and unable to cover their default exposures.
The Valuation issue begs for misuse and future litigation as hedge fund managers etc get sued for overstating the value of their contracts and getting paid 20 % of the inflated estimated value.
John
(that is exactly what happened.... it took out Lehman, Bear, proud egotistical MER guys with ego's as big as Goldman Sach folks ended up working for B of A. AIG the 800 pound gorilla in the insurance industry with a Market Cap that was 8 to 10 times as large as the #2 publically traded insurance company.... had the FED and the US GOVT come in Goldman would be not six feet under but 30 feet..... in cement boots..... )
Greenspan Issues Another Warning On Fannie, Freddie
By JOHN D. MCKINNON and DAWN KOPECKI Staff Reporters of THE WALL STREET JOURNAL September 15, 2005; Page A3
WASHINGTON -- Federal Reserve Chairman Alan Greenspan, in his strongest warning yet, said in a recent letter that Wall Street investment firms eventually could be incapable of hedging all the financial risk posed by mortgage giants Fannie Mae and Freddie Mac, if Congress doesn't impose meaningful limits on them.
"As Fannie and Freddie increase in size relative to the counterparties for their hedging transactions, the ability of these [companies] to quickly correct the inevitable misjudgments inherent in their complex hedging strategies becomes more difficult," Mr. Greenspan wrote in the letter1, dated Sept. 2, to Sen. Robert Bennett (R., Utah), and reviewed by The Wall Street Journal.
Mr. Greenspan's letter concludes: "In the case of [Fannie Mae and Freddie Mac], excessive caution in reducing their portfolios could prove to be destabilizing to our financial system as a whole and in the end could seriously diminish the availability of home mortgage funds."
Legislation to impose a range of new controls over the congressionally chartered companies, known as government-sponsored enterprises, or GSEs, has been stalled in the House, in part over Mr. Greenspan's concerns that it doesn't go far enough in curbing the growth of the companies' mortgage portfolios.
Many conservatives, who see Fannie and Freddie as a form of government intrusion, also worry that another provision of the bill would strengthen the companies' already substantial political clout on Capitol Hill, by substantially raising the amount of money they dedicate to affordable-housing programs around the country.
The two companies borrow money to buy home mortgages. They either hold the mortgages in their own portfolios or sell them to other investors. Because they can borrow almost as cheaply as the federal government itself, critics worry that there are no effective curbs on their potential growth, and particularly the growth of their portfolios. That is a potential concern because their portfolios of mortgages make the companies extremely vulnerable to interest-rate swings.
The companies try to hedge that risk through complicated strategies involving derivative investments such as interest-rate swaps. But Mr. Greenspan and some others worry that as the companies and their portfolios grow, they could overwhelm the ability of Wall Street banks to act as the counterparties. Already, market participants have reported occasional shocks when sudden zigzags in interest rates have brought the companies -- along with other mortgage-market players -- into the swaps market suddenly.
Freddie Mac said Mr. Greenspan's comments were consistent with prior statements he has made. The company also sought to play down concerns about systemic risk posed by its portfolio investments. "Our portfolio is very conservatively managed and tightly regulated," said Freddie spokesman David Palombi, pointing to the elaborate tests that federal officials run to measure its safety. He also suggested that the markets themselves would prevent untoward growth of the companies, and warned that "arbitrarily limiting our retained portfolio would decrease over time the availability of the long-term, fixed-rate, prepayable mortgage."
Fannie declined to comment. Both companies have warned investors that the legislation could materially hurt their profits and affect their ability to promote affordable housing.
While holdings of mortgages and related securities by Fannie and Freddie have soared during the past 15 years, so far this year their combined holdings have declined. At the end of July, the combined total came to about $1.449 trillion, down 7% from the end of 2004. That is partly because Fannie has been shrinking its holdings to meet stiffer capital requirements imposed by the company's regulator in the wake of an accounting scandal.
But critics worry that if the current wave of scrutiny passes without strong new legislative curbs, the companies will be free to start growing again. That concern led Mr. Greenspan to warn earlier this year that passing the House bill would be worse than doing nothing.
Yesterday, the chief proponents of the House legislation sought to improve chances for their bill by amending it to steer more of the companies' profits into affordable housing in the stricken Gulf Coast region. One of the leaders of the effort is Rep. Richard Baker, a Louisiana Republican who represents the Baton Rouge area.
Another proponent, House Financial Services Chairman Michael Oxley (R., Ohio), said the bill is expected to come to a floor vote next week. Still, it isn't clear that the changes will be enough to overcome objections to the House measure among conservative critics.
---- James R. Hagerty contributed to this article.
Write to John D. McKinnon at john.mckinnon@wsj.com4 and Dawn Kopecki at dawn.kopecki@dowjones.com5
