- WASHINGTON (Reuters) -- Federal
Reserve Chairman Alan Greenspan on Tuesday urged Congress to rein in Fannie
Mae and Freddie Mac, warning that unchecked growth in the housing finance
giants will likely threaten the U.S. financial system.
-
- "Most of the concerns associated with systemic risks
flow from the size of the balance sheets that these GSEs (government-sponsored
enterprises) maintain," Greenspan told the Senate Banking Committee.
-
- "GSEs need to be limited in the issuance of GSE
debt and in the purchase of assets, both mortgages and non-mortgages, that
they hold," he added, implying the size of their holdings and the
need to keep growing made them vulnerable.
-
- He also called for clarity in the government's backing
for the companies -- which are shareholder-owned but congressionally chartered
-- saying the current ambiguity had the potential to cause a "very
serious" financial problem.
-
- Fannie Mae's and Freddie Mac's debt is not backed by
the government. But advantages through their charters, including multibillion-dollar
emergency credit lines, foster a perception the government would rescue
them if necessary.
-
- Greenspan's testimony comes as Congress works to create
a new regulator for the two mortgage finance giants and 12 Federal Home
Loan Banks, after problems including an accounting scandal at Freddie Mac.
-
- He noted the two companies "collectively dominate
the financing of residential housing in the United States" and stand
behind more than $4 trillion of mortgages.
-
- He said "the most crucial issue" for lawmakers
as they assess how to tighten their regulation is the potential threat
they pose for economic stability.
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- SHARP ELBOWS
-
- "The problem that exists is because they have a
subsidy, granted not by the Congress but by the expectation that government
will bail them out in the event of a crisis, they have been able to take
a highly competitive position and indeed essentially elbowing out a number
of competitors who did not have such a subsidy," Greenspan said.
-
- The companies likely would be pushing into markets outside
mortgages, he said, "because they need continuous growth rates in
their profitability to maintain the existence of their stock price."
-
- On Tuesday, shares of Freddie Mac were slightly lower
at $63.35, while Fannie Mae shares also dipped to $78.
-
- Greenspan said he would prefer the mortgage companies
operate without any government backing, removing what investors perceive
as a subsidy. He said he personally felt privatizing the GSEs should be
a goal but said "eliminating the subsidy" was the most important
objective.
-
- "I think it's sometimes important to go to the really
important issue -- which is eliminating the subsidy," he said. "That
could be very substantially done, or taken out of the marketplace as a
crucial, disturbing factor, without privatization."
-
- Stiffening regulation of the mortgage companies' activities
took on added profile after Freddie Mac last year revealed it had underreported
earnings by $5 billion because senior management hid profits to sustain
an image of stability.
-
- WHITE HOUSE ANXIETY
-
- In a prominently displayed article in the Financial Times,
the chairman of the White House Council of Economic Advisers, Gregory Mankiw,
said on Tuesday the privileges Fannie Mae and Freddie Mac enjoy should
be reviewed soon and oversight strengthened because even a small problem
"could have ripple effects throughout the economy."
-
- Those privileges include the ability to draw $2.25 billion
each from the Treasury in an emergency, and tax and disclosure exemptions
-- benefits that give the companies higher credit ratings and thus lower
borrowing costs.
-
- Greenspan repeated his call for any GSE regulator to
be able to adjust minimum capital levels to ensure safety and soundness,
coupling that with a strongly worded criticism of some of their existing
ability to grow without restriction.
-
- The Fed chief said Fannie Mae and Freddie Mac faced risks,
particularly interest-rate risks associated with fixed-rate mortgages.
-
- "I should emphasize that Fannie and Freddie, to
date, appear to have managed these risks well and that we see nothing on
the immediate horizon that is likely to create a systemic problem,"
Greenspan said.
-
- "But to fend off possible future systemic difficulties,
which we assess as likely if GSEs' expansion continues unabated, preventive
actions are required sooner rather than later," he added.
-
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