Greenspan: Irrational Exuberance 2

Fannie and Freddie buy mortgages from originators and repackage them for sale to investors as securities. But they also keep some of the loans and securities in their portfolios, which total some $1.5 trillion.

The size of those portfolios sits at the center of the debate over any overhaul of the federal regulator, with many in Congress now in agreement on other issues disputed last year.

While Greenspan was explicit in his criticism and warnings of financial crisis absent portfolio limits, investors took heart in his comments urging a phased-in reduction of Fannie's and Freddie's portfolios, rather than a quick, deep cut.

Greenspan, appearing before the Senate Banking Committee, said regulation without specific growth restraints could actually worsen the dangers the companies pose.

"World-class regulation, by itself, may not be sufficient and, indeed, might even worsen the potential for systemic risk if market participants inferred from such regulation that the government would be more likely to back GSE debt in the event of financial stress," Greenspan said.

But Greenspan's push to place a specific limit of $200 billion on the profit-driving mortgage portfolios held by Fannie and Freddie has already been rejected by a key Republican in the U.S. House of Representatives who was widely expected to propose the most restrictions and toughest on the two companies.

The portfolios together total some $1.5 trillion. (Can anyone say 13% coverage?? Or Keating 5?)

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