- The Washington Times - Thursday, May 5, 2005


Federal Reserve Chairman Alan Greenspan issued a fresh call yesterday for Congress to limit the multibillion-dollar holdings of the mortgage giants Fannie Mae and Freddie Mac, warning that their huge debt could hurt U.S. financial markets.

Mr. Greenspan’s comments came in a speech that focused on the broader issue of the growing use of complex financial instruments, known as derivatives. The Fed chief, as he has done in the past, saw problems with the use of derivatives but also warned against increased government regulation in this area.

Concerns about potential market disruptions posed by the two mortgage giants “will remain valid until the vast leveraged portfolios of mortgage assets held by Fannie and Freddie are reduced and the associated concentrations of market risk and risk-management responsibilities are correspondingly diminished,” Mr. Greenspan said.

Mr. Greenspan’s speech was delivered via satellite to a Federal Reserve Bank of Chicago’s annual conference on banking. A copy of his remarks was distributed in Washington.

On Capitol Hill, various proposals have been offered to rein in Fannie Mae and Freddie Mac.

Fannie Mae is the No. 1 U.S. buyer of home mortgages, while rival Freddie Mac ranks as the second-largest buyer.

Congress created Fannie Mae and Freddie Mac to inject money into the home-loan market. The companies buy mortgages and bundle them into securities for sale to investors worldwide.

During a question-and-answer period, Mr. Greenspan said the two companies “should hold only the minimum level of assets needed to accomplish the primary missions mandated by their charter.”

Shrinking their holdings, he said, could be accomplished “over the course of several years.”

He also said limiting the size of Fannie’s and Freddie’s portfolio holdings probably wouldn’t affect mortgage rates for homeowners because so many big banks and other lenders compete with them in the home-loan market.

Federal regulators last year accused Fannie Mae of serious accounting problems. It was ordered to restate earnings back to 2001, a correction that could reach an estimated $11 billion. The accounting fiasco, which partly involved how derivatives were accounted for, led to the ouster of the company’s chief executive and top financial officer.

Freddie Mac had its own accounting debacle in 2003, which also involved how derivatives were accounted for, and three top executives were forced out. The company had misstated earnings by $5 billion for 2000 through 2002.

On the broader issue of derivatives, Mr. Greenspan said banks, hedge funds and other big financial players that use derivatives always must assess whether they are managing their risk effectively.

“The rapid proliferation of derivatives products inevitably means that some will not have been adequately tested by market stress,” Mr. Greenspan said.

Financial players, he said, “must be aware of the risk-management challenges associated with the use of derivatives … and they must take steps to ensure that those challenges are addressed.”

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