Posted on 02/04/2003 6:52:36 PM PST by AdamSelene235
WASHINGTON -- A faltering in the financial health of either Fannie Mae or Freddie Mac , though remote, would significantly disrupt the U.S. housing market and broader financial system, a report from their federal regulator said Tuesday.
These findings were revealed the same day the White House asked Clinton- appointee Armando Falcon, director of the Office of Federal Housing Enterprise Oversight, to resign from his position more than a year before he was scheduled to leave. Although Mr. Falcon wouldn't comment on the issue, the White House said that it received his resignation early Tuesday and announced its intentions to nominate former JP Morgan Managing Director Mark Brickell, a Republican, to head the young agency.
"The Bush administration and the president appreciates Mr. Falcon's service at OFHEO and wishes him well," said White House spokeswoman Ashley Snee.
Mr. Falcon still delivered during a speech to bond traders a much-anticipated two-year report on systemic risk and said the agency was pushing Congress to give it more authority to manage the companies' day-to-day operations if either should fail.
Fannie Mae and Freddie Mac officials, however, dismissed the agency's report.
"This simply, in our mind, is not a serious piece of policy research," said Freddie Mac spokeswoman Sharon McHale. "It's based on this completely speculative doomsday scenario where we essentially wake up and are insolvent."
Fannie Mae spokesman Chuck Greener agreed: "The Falcon paper is a review of research on systemic risk and discussion of hypothetical scenarios. The director himself acknowledged these scenarios are hypothetical and quite remote."
Still, the study found the sheer size of Fannie Mae and Freddie Mac and volume of mortgages they purchase or secure make them an integral part of the U.S. economy and inherent risk if either were to become insolvent.
The companies own or guarantee 45% of all outstanding residential mortgages in the U.S. Their combined mortgage portfolios are valued at more than $1.2 trillion, a more than sevenfold increase since 1990. And the combined value of the mortgage-backed securities they guarantee for other investors is $1.5 trillion, a large chunk of which is held by federally insured banks, according to the study.
"A problem at an enterprise may not only directly contribute to the possibility of a financial crisis and a systemic event but may also create problems at counterparties that could translate into their contributing to such events," the report reads.
At the same time, Mr. Falcon said Fannie and Freddie have provided a source of stability in the economy over the last two years, sheltering the U.S. housing sector from undue stress and helping to mitigate systemic risk.
"Fannie Mae and Freddie Mac are very strong financial institutions today, and the possibility of either enterprise failing or contributing to a financial crisis is remote," Mr. Falcon said. "Any systemic disruption would likely be minimal as OFHEO took prompt corrective action and other market participants filled the short-term market void."
Since his appointment in 1999, Mr. Falcon has overseen the agency in developing complicated risk-based capital rules for Fannie and Freddie. He also helped craft an agreement last July that will result in Fannie and Freddie filing their financial disclosures with the Securities and Exchange Commission for the first time ever this spring. He additionally helped author a joint study with the SEC and Treasury Department released Monday about the companies' mortgage-backed securities disclosures.
"He has assembled a superb examinations staff and has put in place a comprehensive regulatory structure," Mr. Greener said.
Speculation about Mr. Falcon's departure Tuesday left the markets uneasy, analysts said.
"I don't think you'll see either of these companies trade up significantly with this news, but political risk with respect to these companies is still an important part of Fannie and Freddie's story," said Andrew Parmentier, a policy analyst with investment house Friedman, Billings, Ramsey, which is just outside Washington. "Investors think that a new regulator can ease some of those worries over time."
OFHEO nominee Mark Brickell is currently the chief executive of Blackbird Holdings Inc., an electronic trading system for derivatives contracts. He spent 25 years with JP Morgan and was an influential and outspoken player in devising new commodities trading laws passed in late 2000. He also served as chairman of the International Swaps and Derivatives Association from 1988 to 1992 and helped author a prominent Group of Thirty study on derivatives.
Mr. Brickell has an MBA from Harvard Business School and a bachelor's degree from the University of Chicago.
"His broad experience in the global capital and derivatives markets and his understanding of modern risk management tools and strategies make him an excellent choice for this important role," Ms. McHale said.
Don't worry Franklin Delano Raines is still the head of Fannie. Yep, that's FDR.
Wonder what his political leanings are?
I sure hope so. I want to buy a house!
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