WASHINGTON - A bill to revamp the regulation of the housing government-sponsored enterprises has stalled, but the Bush administration has not stopped banging the reform drum.
The Office of Federal Housing Enterprise Oversight said last week that it plans to release a proposal outlining how it would handle Fannie Mae and Freddie Mac if they ran into financial difficulty, and Treasury Department officials reiterated that they are considering limiting GSE debt issuances.
Both issues are important to the debate, but neither is particularly well understood. In an attempt to clarify, American Banker presents a list of questions and answers on some key points.
What exactly is this OFHEO proposal, and when will it be made public?
OFHEO is working on a plan that would outline its "liquidating conservatorship" authority: the ability to run Fannie and Freddie if either encountered severe financial problems. OFHEO officials have not said when the details will be released, but the Office of Management and Budget must review the proposal, and that process often takes months.
What does "liquidating conservatorship" mean?
A conservator takes over a financially troubled institution for a limited time to help it recover; a receiver assumes control and starts selling assets in order to shut the institution down.
A "liquidating conservatorship" is somewhere in between. OFHEO would have the powers of a conservator as well as some of the abilities of a receiver, including the ability to sell assets.
Could a liquidating conservator sell all of an institution's assets? In other words, could OFHEO be a receiver in all but name?
Potentially, yes. That will be one of the key elements to look for when OFHEO releases its proposal. Some sources said the agency is essentially trying to fill in gray areas in the law granting it conservator power. Where such areas exist, it is leaning toward giving itself receivership powers. But it remains unclear if OFHEO will try to, or legally can, construct its conservatorship power so strongly that it would become a de facto receiver.
Wait a second. Does OFHEO know something we don't? Are the GSEs in trouble?
No, but you might be excused for thinking so. Whether OFHEO, or a new regulator that would be created by the pending legislation, can put the GSEs into receivership has been a key issue in the debate. The issue, however, is largely political and is not motivated by a belief that Fannie and Freddie will face financial difficulties in the near future.
In any case, wouldn't the government step in and save Fannie or Freddie if one were in trouble?
Almost certainly. Despite what Treasury officials across several administrations have said, and what the GSEs themselves claim in public, policymakers, academics, regulators, and industry observers agree - at least in private - that the government would not let Fannie or Freddie fail.
They have this government guarantee for two reasons. First, like Citigroup Inc. and Bank of America Corp., Fannie and Freddie are huge, and their failure could cause an economic shock wave. Second, they have special ties to the government, and their collapse could cast doubt on other government obligations.
Why are we debating conservatorship/receivership powers if they will never be used?
The issue has taken on a symbolic importance. While privately many officials say Fannie and Freddie would receive some kind of bailout (though it could be limited to debtholders and exclude shareholders), they are trying to sow seeds of doubt among investors.
If there is some doubt about the government's guarantee, the thinking goes, investors will demand quicker responsiveness from the GSEs' management and will scrutinize their statements more carefully. On the other hand, if investors, particularly debtholders, believe Uncle Sam will bail out Fannie and Freddie, they are less likely to exert this so-called market discipline.
So the battle on receivership and conservatorship is more about perception than reality?
Exactly. Federal Reserve Board Chairman Alan Greenspan and Treasury Secretary John Snow both say that granting a new GSE supervisor receivership authority would send investors a message that the GSEs are not backed by the government.
The theory works something like this - since OFHEO does not have the authority to shut down Fannie or Freddie (by putting them in receivership), investors believe that only Congress can do so, and investors have great faith in the ability of legions of GSE lobbyists to prevent that from happening. But if a new regulator had receivership power, investors would know that the decision to let the GSEs fail is not in congressional hands.
Of course, in a twist George Orwell would be proud of, this theory works only to the degree to which investors believe it works.
Fannie and Freddie repeatedly argue that giving a new regulator receivership authority would threaten their debt ratings, raise funding costs, and ultimately drive up mortgage rates.
However, of the three major ratings agencies, only Standard & Poor's Corp. has said it is concerned about the bill's receivership language. (The bill - including a receivership provision that would retain a role for Congress - passed the Senate Banking Committee on April 1 but is not expected to be enacted this year.)
Why should we care about the OFHEO conservatorship rule?
Don't. OK, at least wait to see what is actually proposed. But for now Wall Street is unfazed.
"The conception of OFHEO's discussions about 'liquidating conservatorship' representing a tough new stance and an obstacle for debt investors is wrong. Period," Jim Vogel, the director of agency research at First Horizon National Corp.'s FTN Financial, said in an interview last week.
Moving on, will the Treasury limit GSE debt issuances?
Though it is tempting to dismiss the Treasury talk as a bluff, several sources said the move is under serious consideration. The Treasury contends it has the power to block GSE debt sales, but others say it may direct only the timing.
What's the endgame here?
Getting Fannie and Freddie - or their boards or even their shareholders - to cut a deal on reform.
It's tough to say if that strategy will work, however.
As the debate moves beyond safety-and-soundness regulation - and into areas such as the implied government guarantee and limitations on growth - they may feel fewer incentives to deal, not more.
"The administration has a lot of tools and leverage under current authorities to bring to bear on the process," said Sheila Bair, a professor at the University of Massachusetts, Amherst, who supports the Bush administration's position. "But the question is - how far do you push before Fannie no longer sees it in its interest to come to the table at all?"
