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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (161452)	4/23/2002 5:16:26 AM
From: Bocor	Read Replies (1) \| Respond to of 436258

Reuters Business Greenspan Questions Fannie, Freddie By Stella Dawson NEW YORK (Reuters) - Federal Reserve Chairman Alan Greenspan on Monday warned that government backing for Fannie Mae and Freddie Mac may prompt those who trade their mortgage securities to take excess risks, the latest wrinkle in the long debate over the housing finance giants. ADVERTISEMENT The Fed chief said if investors in their mortgage derivatives have a false sense of faith that the government would quickly ride to the rescue of so-called government-sponsored enterprises (GSEs), that could distort markets. ``In this case, the perception of government support may induce counterparties of GSEs to apply less vigorously some of the risk controls that they apply to manage their over-the-counter derivatives exposures,'' Greenspan told the Institute of International Finance. ``More generally, we need to be careful not to allow subsidies to unduly disturb an efficient financial structure that has so clearly contributed to increased economic stability,'' he said in a speech via satellite to the group. A spokeswoman for Fannie Mae, Janice Daue, disagreed that the GSEs posed a risk, pointing out that their credit rating is excellent even without federal benefits. ``We see no evidence that our derivatives counterparties are not applying careful credit judgement in their transactions with us,'' she added. FUEL FOR CRITICS Chartered by Congress to promote home ownership, Fannie Mae (NYSE:FNM - news) and Freddie Mac (NYSE:FRE - news) receive government support in the form of lines of credit from the U.S. Treasury, some tax breaks and exemptions from some Securities and Exchange Commission fees and disclosure requirements. The subsidies are a hot issue with some members of Congress, particularly Louisiana Rep. Richard Baker, on a campaign for years to rein in Fannie Mae and Freddie Mac. Supporters of the firms tout their role as financial intermediaries, saying they help make homeownership more broadly affordable to Americans. Greenspan's comments could add momentum to the efforts of GSE critics such as Baker. But those attempts face an uphill battle, with little appetite in the Democratic-controlled Senate for altering the congressional charter. Further dampening the political will to tinker with the charter is the widely held view -- voiced by Greenspan himself -- that the robust housing market has helped soften the economic blow from the recession that began in March 2001. But the Fed chairman said financial-sector problems could arise if investors are not mindful enough of the hazards. ``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. ``Subsidies, by intent, distort the normal balance of markets.'' Greenspan has aired concerns about GSEs before. In 2000, in a letter to Baker, Greenspan said it was appropriate for Congress to periodically consider the ``implicit subsidies.'' But his remarks on Monday went further in highlighting concerns. In the summer of 2001, the Congressional Budget Office said Fannie and Freddie enjoyed subsidies valued at $10.6 billion in 2000. SUPPORTIVE OF DERIVATIVES While raising concerns on derivatives used in mortgage finance, Greenspan was generally supportive of derivatives. Those securities allow investors to fine-tune their exposures to various risks, such as moves in interest rates or foreign exchange values. In some instances, they can be used to make big bets, although the GSEs contend they themselves never use derivatives for speculative purposes. But the GSEs' extensive use of derivatives, usually to hedge exposure to interest-rate movements, has drawn criticism, including from the editorial pages of the Wall Street Journal. Both firms have begun providing more information on the transactions in an attempt to ease concerns. Greenspan cited some downsides to derivatives. ``Their very complexity could leave counterparties vulnerable to significant risk that they do not currently recognize, and hence these instruments potentially expose the overall system if mistakes are large,'' he said. Still, Greenspan described the instruments as part of a larger trend of financial innovation that may have helped smooth out the usual volatility in business cycles. In the wake of the failure of energy trading giant Enron Corp. (Other OTC:ENRNQ.PK - news), some lawmakers have called for more regulation of derivatives. But Greenspan traced the problems of both Enron and Long Term Capital Management -- a hedge fund that nearly collapsed in 1998 -- to other problems such as ``opaque accounting.'' ``Swaps and other derivatives have been remarkably free of default throughout their short history, including over the past 18 months,'' he said.