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Greenspan and GSE Heads Disagree

FEBRUARY 27, 2004


Greenspan and GSE Heads Disagree

Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee this week that the systemic risks posed by the housing GSEs to U.S. taxpayers and the economy far outweigh any boost they give to homeownership levels.

Greenspan endorsed the creation of a new GSE regulator "on a par with that of banking regulators, with a free hand to set appropriate capital standards, and with a clear process sanctioned by the Congress for placing a GSE in receivership." But that alone is not enough, the Chairman added.

The remedy, Greenspan said, is to limit the issuance of GSE debt and the purchase of assets, both mortgages and non-mortgages, with privatization being the eventual goal (which he said was his personal opinion, and not that of the Board).

Chairman Greenspan's message moved the GSE debate beyond just the nuts and bolts of regulatory restructuring. He focused the Committee on the size of Fannie and Freddie's balance sheets, their implied subsidies and implied government guarantee as the roots of systemic risk and market difficulties that he said, while not on the horizon, are likely.

In a second day of hearings this week on GSE regulatory restructuring, Fannie, Freddie and the FHLBs responded to Chairman Greenspan's testimony. Fannie and Freddie strongly disagreed with Chairman Greenspan, testifying that they pose no immediate risk to the banking system and the economy nor do they have an unfair funding advantage due to an implied subsidy.

Fannie Mae Chairman and CEO Franklin Raines noted if the GSE's growth were constrained, the risks would have to be passed on primarily to commercial banks and thrifts, and these institutions take insured deposits that have an explicit guarantee from the government.

Strong opposition was also raised to granting receivership powers to the new regulator. Freddie Chairman, Richard Syron noted that while it is appropriate for large financial institutions with depositors and deposit insurance, receivership has little practical application for GSEs whose funding comes from world capital markets. Both Fannie and Freddie offered that conservatorship would be a better alternative.

Testifying for the Federal Home Loan Banks, Norman Rice, president and ceo of the Federal Home Loan Bank of Seattle, said that the unique nature of the System must be preserved. The new regulator, he said, "must have a laser focus on following the will of Congress in assuring fulfillment of the mission and the safety and soundness of the housing GSEs, not the agendas of outside agencies and other political influences." Rice recommended creating separate divisions within the new regulatory unit to govern Fannie and Freddie in one division, and the FHLBs in the other.