Posted on 02/24/2004 11:26:36 AM PST by AdamSelene235
WASHINGTON (AP) -- Mortgage giants Fannie Mae and Freddie Mac could pose a threat to the financial system in the United States if their debt is not restrained, Federal Reserve Chairman Alan Greenspan said Tuesday, urging Congress to consider capping the debt the two companies can carry.
Greenspan said that the two institutions, popularly known as Fannie and Freddie, have grown to be among the nation's largest financial institutions and now stand behind $4 trillion of home mortgages, or more than three-fourths of the single-family mortgages in the United States.
Greenspan said he believed both institutions have managed their financial risks well to date, but he said that he believed risks would rise if the two institutions allowed their debt levels to grow in the future without any restraints.
He said that "future systemic difficulties" could be considered likely and he urged Congress to take action "sooner rather than later."
With his testimony before the Senate Banking Committee, Greenspan put his considerable influence on financial matters behind a growing effort to overhaul the two institutions, which financial competitors contend have become too big and now threaten the security of the financial system.
Senate Banking Committee Chairman Richard Shelby told the hearing that he considered creation of a new government regulator for Fannie and Freddie along with the Federal Home Loan Bank System to be a top priority of the committee this year.
Shelby is supporting legislation to replace the current Office of Federal Housing Enterprise Oversight, which critics say lacks the power to properly regulate institutions of the size of Fannie and Freddie.
Fannie Mae and Freddie Mac, the two biggest players in the multitrillion-dollar home mortgage market, have come under increased scrutiny since an accounting crisis at Freddie Mac came to light last spring. Freddie acknowledged that it had understated earnings by $5 billion for 2000 through 2002 and later admitted inflation 2001 profits by nearly $1 billion.
In his testimony, Greenspan said it would not be enough for Congress to simply establish a new regulatory body if this regulator was not given adequate regulatory powers to deal with such issues as the implicit guarantees these institutions are believed to have from the federal government.
Greenspan said this implicit guarantee clearly existed in the minds of investors even though there is an explicit statement in the debt issued by the two institutions that they are not backed by the full faith and credit of the U.S. government.
Despite this statement, Greenspan said, "most investors have apparently concluded that during a crisis the federal government will prevent the (institutions) from defaulting on their debt."
This perceived government guarantee has allowed both institutions to borrow at lower interest rates. The two institutions contend that they pay these savings on to home buyers in the form of lower mortgage rates.
But Greenspan cited a recent Fed study that found that only a small portion of this subsidy was passed on to home buyers and the far bigger portion of the subsidies, in the billions of dollars, was passed on to the stock holders of Fannie and Freddie, which are both publicly traded companies.
Greenspan, responding to questions by the committee, said that the perceived government backing for Fannie and Freddie had given the institutions a tremendous competitive advantage that means they have "essentially elbowed out a number of competitors" and allowed the institutions to grow substantially.
"The Federal Reserve is concerned about the growth and the scale of the (institutions') mortgage portfolios, which concentrated interest rate and prepayment risks at these two institutions," Greenspan said.
He said that Congress should consider limiting the size of the institutions' debt burdens, saying that even with limits, the two institutions would remain "among the largest financial institutions in the United States and would be able to grow with the size of the mortgage markets."
Greenspan also encouraged Congress to create a new regulator that would be on an equal level in terms of power with the federal government's banking regulators. He said the new regulator should have the authority to set appropriate capital standards for the two institutions.
The United States government: too big to fail.
Seems that's what they intend to do.
I think we should replace E Pluribus Unum with:
The United States, still not as Socialist as France !!
Old Trusty Al just didn't pull this piece of little advice out of his hat for fun. What is he really trying to say?
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