Here we go again. Professional GSE critics Peter Wallison and Charles Calomiris, speaking now for the Shadow Financial Regulatory Committee, declare, as the headline of their May 11 Viewpoints article puts it, that the “Subordinated Debt Issuance by Fannie, Freddie Falls Short.” In nitpicking our subordinated debt program, Mr. Wallison and Mr. Calomiris simply refuse to take yes for an answer.

Fannie Mae’s subordinated debt program is exactly what the “Shadow Committee” has long advocated; in fact, Fannie Mae and Freddie Mac are the first financial institutions in America actually to carry out what, for most, is still just at the concept stage. We did it not to please Mr. Wallison and Mr. Calomiris, but because the market discipline provided by issuing subordinated debt makes our companies even more safe and sound than ever.

Their critique ignores the obvious: Fannie Mae’s subordinated debt is voluntary, revolutionary, and far more stringent than any bank subordinated debt program. For instance, banks often choose when to suspend interest payments to their subordinated debtholders; our suspension triggers automatically if trouble occurs. Our subordinated debt also works in tandem with other cutting-edge measures enhancing our market discipline, including regular interest rate risk and credit risk disclosures, and independent ratings on our company and on our possible risk to the government.

With its cutting-edge capital requirements and market discipline, the model used by Fannie Mae and Freddie Mac is recognized as the new global model for financial institution safety and soundness. It is inarguable that, if all large financial institutions adopted our model — including our subordinated debt program — the entire financial system would be stronger for it.

But let’s look at the quibbling. It is important to note that where Mr. Wallison and Mr. Calomiris say Fannie Mae falls short, they compare our subordinated debt program to an artificial standard — proposals that nobody else has adopted. So when they question our subordinated debt program, their answer is purely theoretical.

One of their main arguments is that we adopted our program voluntarily rather than in response to a mandate by our regulator. Besides the fact that no other financial institution faces a mandatory requirement, Fannie Mae has made a public commitment to its program. The markets would surely take note if we backed off that commitment.

Mr. Wallison and Mr. Calomiris then argue that Fannie Mae’s subordinated debt program is too small. In fact, Fannie Mae and Freddie Mac will be issuing $20 billion to $25 billion in subordinated debt over the next three years, a sizable amount in anybody’s book and one that is, crucially, large enough to establish a liquid market that gives reliable price signals.

They also argue that our subordinated debtholders are not “credibly subject to loss.” In fact, if our capital dropped to a certain level, our subordinated debtholders would see their interest payments suddenly halt. Furthermore, if we were delinquent on payments to any of our senior debtholders, they would have to stand in line to get paid.

If our subordinated debtholders are not at greater risk, as Mr. Wallison and Mr. Calomiris assert, how to explain that the market has priced our subordinated debt an average of 24 basis points higher than our senior debt, a spread that Wall Street attributes largely to the greater risk?

Mr. Wallison and Mr. Calomiris dismiss this spread as tiny. But our subordinated debt appears to be priced by the market in the same way that bank subordinated debt is priced relative to senior debt. Saying that our subordinated debt spread is tiny is equivalent to saying that the spread on bank subordinated debt is similarly small.

They also hold, without any attempt to back their contention, that the spread represents a liquidity, rather than a risk, premium. Our medium-term notes, which are substantially less liquid than our regular Benchmark senior debt, trade at a premium of only two to five basis points, showing that most of the 24-basis-point average spread of the subordinated debt is a market determined risk-related premium.

Fannie Mae’s subordinated debt program has all these features. If we “fall short,” is it because Mr. Wallison and Mr. Calomiris have moved the goal posts? And what is the Shadow Committee saying about large financial institutions that do not have anything close to our subordinated debt program? If the Shadow Committee cannot take yes for an answer, and accept that Fannie Mae’s initiative is satisfactory, perhaps at least it can acknowledge it is the strongest in the industry.

Mr. Christenson is senior vice president for regulatory policy at Fannie Mae.

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