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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7196)	9/19/2005 11:49:12 AM
From: John Pitera	Read Replies (2) \| Respond to of 33421

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