Paul Volcker Interview - Charlie Rose March 18 2008

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34 minutes long.

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Re: Paul Volcker Interview - Charlie Rose March 18 2008

Volcker argues that the GSEs—not the Fed—should be the agencies which absorb the nonperforming mortgage debt and provide liquidity to the distressed investment banks. But the GSEs (Fannie Mae and Freddie Mac) are in no shape to do so.

In Volcker's day they were government agencies, but were privatized in order to remove them from the Federal budget. Their unique status as "Government Sponsored Entities" means that they exist outside the normal rules of public companies. They have a credit line with the Treasury, but their debt is not explicitly guaranteed by the Treasury. They have publicly traded shares, but they are outside the SEC's jurisdiction. They have been extremely profitable for their managers, who run them with shadowy accounting and under lax oversight from their regulator, OFHEO. The amount of leverage on their books is already astronomical, and the bonds they have issued are held by central banks around the world just like Treasury bonds.

They were supposed to protect the financial system from distresses in housing finance. Instead they are cash cows for their managers and shareholders. They won't step in and help because it is not in their private interest.

[GRG55]

Re: Paul Volcker Interview - Charlie Rose March 18 2008

Volcker argues that the GSEs—not the Fed—should be the agencies which absorb the nonperforming mortgage debt and provide liquidity to the distressed investment banks. But the GSEs (Fannie Mae and Freddie Mac) are in no shape to do so.

In Volcker's day they were government agencies, but were privatized in order to remove them from the Federal budget. Their unique status as "Government Sponsored Entities" means that they exist outside the normal rules of public companies. They have a credit line with the Treasury, but their debt is not explicitly guaranteed by the Treasury. They have publicly traded shares, but they are outside the SEC's jurisdiction. They have been extremely profitable for their managers, who run them with shadowy accounting and under lax oversight from their regulator, OFHEO. The amount of leverage on their books is already astronomical, and the bonds they have issued are held by central banks around the world just like Treasury bonds.

They were supposed to protect the financial system from distresses in housing finance. Instead they are cash cows for their managers and shareholders. They won't step in and help because it is not in their private interest.

Actually they will step in "to help". That is exactly what they did during the early '90s S&L crisis, and even more so after the tech bubble burst in 2000. The extraordinary expansion of the GSE balance sheets this decade was an integral part of creating the housing bubble. Politicians nostalgic for the good 'ol days [and that's just about all of them] are busy trying to recreate them by responding to Fannie and Freddie's petitions to reduce their lending limitations. Even Bernanke is advocating a relaxation of GSE lending limits, but only as a "temporary" measure.


From the text of the Statement of Ben Bernanke, Chairman of the Board of Governors of the U.S. Federal Reserve System, before the Committee on Financial Services, U.S. House of Representatives on Sept. 20, 2007.

"...Some have suggested that the GSEs could help restore functioning in the secondary markets for non-conforming mortgages (specifically jumbo mortgages, those with principal value greater than $417,000) if the conforming-loan limits were raised. However, in my view, the reason that GSE securitizations are well-accepted in the secondary market is because they come with GSE-provided guarantees of financial performance, which market participants appear to treat as backed by the full faith and credit of the U.S. government, even though this federal guarantee does not exist. Evidently, market participants believe that, in the event of the failure of a GSE, the government would have no alternative but to come to the rescue. The perception, however inaccurate, that the GSEs are fully government-backed implies that investors have few incentives in their role as counterparties or creditors to act to constrain GSE risk-taking. Raising the conforming-loan limit would expand this implied guarantee to another portion of the mortgage market, reducing market discipline further. If, despite these considerations, the Congress were inclined to move in this direction, it should assess whether such action could be taken in a way that is both explicitly temporary and able to be implemented sufficiently promptly to serve its intended purpose. Any benefits that might conceivably accrue to this action would likely be lost if implementation were significantly delayed, as private securitization activity would likely be inhibited in the interim..."

Interestingly enough the day before this statement by Bernanke, Bloomberg had this story:

Sept. 19 (Bloomberg) -- The Bush administration reversed policy, allowing Fannie Mae and Freddie Mac, the two largest sources of money for U.S. home loans, to expand their investments in an effort to make mortgages easier to get.

The Office of Federal Housing Enterprise Oversight will permit Washington-based Fannie Mae and Freddie Mac to boost their loan portfolios by about 2 percent a year beyond a cap of about $1.5 trillion. Just two days ago, Federal Reserve Chairman Ben S. Bernanke in a letter to Representative Barney Frank said easing restrictions on the companies could prove to be ``ill-advised.''