Fed official warns that housing finance giants pose systemic risk

Section:

http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=5066355

CHICAGO, May 6 (Reuters) -- St. Louis Federal Reserve
President William Poole on Thursday called for the
elimination of government lines of credit to mortgage
finance giants Fannie Mae and Freddie Mac to reduce
risks to the U.S. financial system in the event of a
crisis at either company.

"There is no question but that a crisis affecting either
Fannie Mae or Freddie Mac would have widespread
effects because these firms are so large," Poole said
in remarks prepared for delivery to a banking conference
organized by the Chicago Federal Reserve.

Poole said elimination of the ability of both companies
to tap the U.S. Treasury Department for emergency
loans of $2.25 billion each would make clear to markets
that the government does not stand behind the
companies' debt.

"Investors have priced these obligations under the
assumption there are no possible risks that might
strain (government sponsored enterprise) capital
positions," he said.

Poole said that while there is no crisis evident for
the obligations of the housing
government-sponsored enterprises, their capital
positions were "undesirably thin" and leave the
firms "unnecessarily vulnerable to surprise shocks."

Poole's comments come amid an ongoing debate
about toughening supervision of Fannie Mae and
Freddie Mac after an accounting scandal at Freddie
Mac last year rattled investors.

He said an assumption that the government stands
behind the GSEs was typical of the type of behavior
that has preceded past financial crises.

Fannie Mae and Freddie Mac pose risks because
they pursue a strategy of borrowing for the short
term while lending for the long term and maintain
a thin capital margin, Poole suggested.

He said clear procedures for closing either company
in a crisis should be established.

"Should a crisis occur, it will take hold so quickly
that GSE obligations will in a matter of hours, or
days, become illiquid. While any one holder of
GSE debt can exit, not all holders can exit at
once," Poole said.

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