Fed Official Continues To Assail Freddie, Fannie

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The Federal Reserve, considered the most authoritative arbitrator of the financial world, continued its academic assault on Fannie Mae and Freddie Mac last week.

After a speech in St. Louis, the president of the Federal Reserve Bank of St. Louis, William Poole, called for the privatization of the two government-sponsored enterprises. Poole's remarks came the day after the Fed released separate studies showing the government benefits provided the secondary mortgage market giants mainly benefited shareholders and not homeowners, and that their market-making activity does little to calm the huge mortgage securities markets.

But Poole, a sometime critic of the two GSEs, took the issue further in an answer to a reporter's question. "My preferred strategy would be to transition these firms to fully private status, and have them more in the situation of GE Capital, which is not regulated by a federal agency," he said. Poole said he would raise the companies' capital requirements to the equivalent of banks' and then end the companies' ties to government. Markets would then be the arbiters of adequate capital for the companies.

"I would like the market to make that judgment, quite frankly," Poole said.

Earlier the same week the Fed issued a study that found that the two government-sponsored enterprises receive benefits and subsidies amounting to as much as $182 billion, with shareholders receiving well over half of that. More than half of the government benefits accrue from the implicit federal guarantee of debt, good for as much as a 40-basis-point premium on the billions of dollars in debt issued by the two mortgage giants. But that vast subsidy does not benefit homeowners, the Fed said.

The study concluded that 44% to 89% of the two companies' market value is due to their perceived government support. The perception of government support, which allows Fannie and Freddie to issue higher-rated debt, comes from separate $2.5-billion lines of credit each company has with the U.S. Treasury. The lines of credit give the perception that the federal government will bail them out in times of crisis. The two companies also enjoy millions of dollars in other government benefits, including exemption from state and local taxes and from SEC registration fees for the trillions of dollars in securities they have underwritten.

A second study found that the mortgage securities market has become so vast that activity by Fannie or Freddie does little to affect mortgage spreads. The study tested the theory that Fannie's and Freddie's market-making should have a significant impact on spreads in the mortgage backed markets. But the study concluded there is no evidence of a major impact on MBS spreads.

The Fed's assault on Fannie and Freddie comes as Congress is preparing to open debate on a new regulatory scheme for the secondary mortgage market, including another government sponsored housing enterprise, the Federal Home Loan Bank System.

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