WASHINGTON Markets reacted positively to Freddie Macs and Fannie Maes pledge Thursday to enhance their disclosure and capital risk management practices.
The commitments were part of a voluntary agreement with Rep. Richard H. Baker, R-La., who as chairman of House Bankings capital markets subcommittee led a vigorous effort this year to pass legislation that would meet those goals and stiffen federal regulation of the two government-sponsored enterprises.
Goldman Sachs & Co. analyst Howard Shapiro said the agreement takes political risk off the table for Freddie and Fannie and allows investors to focus on their strong operating fundamentals. There had been a lot of uncertainty out there regarding the enterprises, he said.
Thomas ODonnell, a mortgage finance analyst at Salomon Smith Barney in New York, said the commitments are a win-win situation for everybody, showing that the GSEs are flexible and have nothing to hide.
By Thursday afternoon Goldman Sachs had upgraded the companies to its recommend list, its highest rating. Both companies stock rose during a bullish Wall Street session. Fannies share price climbed $6.75, or 9.53%, to close at $77.56; Freddies $4.94, or 9.59%, to $56.44.
At a press conference, Rep. Baker praised the agreement for laying the groundwork for a new high-water mark of corporate responsibility, market transparency, market self-discipline, and proactive protections against systemic risk.
However, he said that he still wants to revamp federal oversight of Fannie and Freddie and that he will introduce legislation next year to create an independent regulatory body that has resources established apart from the appropriations process and prompt-corrective-action authority and the power to enforce it.
Rep. Baker said that he has not determined what type of regulatory system he will propose. However, he mentioned the possibility of the Treasury Department or the Office of Thrift Supervision being responsible for oversight.
At the same time he did not discount his proposal in this years bill to consolidate the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board, and some authority of the Department of Housing and Urban Development.
Rep. Baker said he plans to discuss all ideas with regulators before issuing a discussion draft bill when the new Congress convenes next year.
Fannie and Freddie promised Thursday to issue publicly traded, externally rated subordinated debt every six months and to install an interim, risk-based capital test until OFHEO adopts permanent rules.
Industry watchers said another important provision was the agreement to obtain and publicly disclose a rating from a nationally recognized debt rating organization.
Freddie and Fannie also committed themselves to maintaining more than three months worth of liquidity, which would reduce the possibility that their operations could be disrupted during a significant financial crisis. The two will publicly disclose results of monthly interest rate risk sensitivity analyses and quarterly credit risk sensitivity analyses.
Capitol Hill sources said Freddie approached Rep. Baker this week with its pledges. Fannie agreed to them late Wednesday.
Andrew C. Palmer, director of fixed-income investments at ASB Capital Management, said Fannie and Freddie were forced to compromise with Rep. Baker before the election. If the congressman becomes House Banking chairman next year, the companies could find themselves subject to a law rather than a voluntary agreement, Mr. Palmer said.
Freddie Mac chairman and CEO Leland C. Brendsel said he hopes the deal will quell congressional calls for a new regulatory body. I believe questions regarding our future safety and soundness raised earlier this year are now firmly laid to rest, he said.
Barbara A. Rehm contributed to this story