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Fannie and Freddie: a warning from Greenspan
By Edmund L. Andrews NYT
Wednesday, February 25, 2004
SourceWASHINGTON Alan Greenspan, chairman of the U.S. Federal Reserve, warned Tuesday that the nation's two government-sponsored mortgage institutions posed a "systemic risk" to the financial system that could cost taxpayers dearly in the future.
Greenspan warned that Fannie Mae and Freddie Mac, which buy up and package billions of dollars worth of mortgages every year, now hold about $2 trillion in debt and are not in a position to adequately hedge that risk in anticipation of a future financial crisis.
The Fed chairman warned that both institutions have been able to borrow money at lower rates than other financial institutions, because investors believe the Federal government would bail them out if they ran into serious trouble.
Greenspan argued that the two companies, which indirectly finance a huge share of the nation's home mortgages, have become riskier by virtue of their own increased borrowing over the years and would be better off if they were treated no differently than other financial institutions.
Even though Fannie Mae and Freddie Mac are both for-profit corporations, Greenspan said the two companies receive a huge "implied subsidy" by virtue of their special status as "government-sponsored enterprises."
"There is a general belief in the marketplace that these securities are backed by the full faith and credit of the United States government," Greenspan testified at a hearing of the Senate Banking Committee, even though that is "explicitly not so stated."
Congress and the Bush administration have been wrestling for months over the best way to regulate the two institutions, which have seen their loan portfolios soar from $223 billion in 1992 to at least $1.75 trillion today.
The two institutions have been embroiled in accusations of questionable accounting practices over the past two years. The Treasury Department is pushing to take over the regulation of both companies and impose tougher requirements on issues like capitalization and operating practices.
Fannie Mae officials quickly lashed back at Greenspan, complaining that many of his criticisms were based on a Federal Reserve study that it called "seriously flawed." Jayne Shontell, Fannie Mae's senior vice president for investor relations, said, "We believe that the testimony does not appreciate the role of our mortgage portfolio and the impact of his proposal."
The New York Times
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