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Get Four
|  | MARCH 2, 2004
ECONOMIC BRIEF Greenspan Goes Conceptual [Page 3 of 3] Tuesday, Feb. 24 Greenspan testified before the Senate Committee on Banking, Housing & Urban Affairs What he said: "Why do [government-sponsored enterprises, or GSEs] Fannie [Mae] and Freddie [Mac] now generate such substantial concern? The unease relates mainly to the scale and growth of the mortgage-related asset portfolios held on their balance sheets.... "Importantly, the [GSEs'] scale itself has reinforced investors' perceptions that, in the event of a crisis involving Fannie and Freddie, policymakers would have little alternative than to have the taxpayers explicitly stand behind the debt [of these mortgage-finance firms]. This view is widespread in the marketplace despite the privatization of Fannie and Freddie and their control by private shareholders, because these institutions continue to have government missions, a line of credit with the Treasury, and other government benefits, which confer upon them a special status in the eyes of many investors.... "Congressional Budget Office and other estimates differ, but they come to the essentially same conclusion: A substantial portion of these GSEs' implicit subsidy accrues to GSE shareholders in the form of increased dividends and stock-market value. Fannie and Freddie, as you know, have disputed the conclusions of many of these studies.... "I should emphasize that Fannie and Freddie, to date, appear to have managed these risks well and that we see nothing on the immediate horizon that is likely to create a systemic problem. But to fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later.... "Most of the concerns associated with systemic risks flow from the size of the balance sheets that these GSEs maintain. One way the Congress could constrain the size of these balance sheets is to alter the composition of Fannie's and Freddie's mortgage financing by limiting the dollar amount of their debt relative to the dollar amount of mortgages securitized and held by other investors.... "The Congress needs to create a GSE regulator with authority on a par with that of banking regulators, with a free hand to set appropriate capital standards, and with a clear process sanctioned by the Congress for placing a GSE in receivership. However, if the Congress takes only these actions, it runs the risk of solidifying investors' perceptions that the GSEs are instruments of the government and that their debt is equivalent to government debt. The GSEs will have increased incentives to continue to grow faster than the overall home mortgage market.... "Thus, GSEs need to be limited in the issuance of GSE debt and in the purchase of assets, both mortgages and non-mortgages, that they hold." What it means: This is the Fed chief's most public criticism to date of the mortgage-finance giants. It's significant that he's emphasizing the need for a new regulator of housing GSEs like Freddie Mac and Fannie Mae, notes Informa, with powers to set capital standards and limit the issuance of GSE debt and purchase of assets. Greenspan did say Fannie and Freddie, to date, appear to have managed these risks well. But to fend off possible future systemic difficulties, which he sizes up as likely if GSE expansion continues unabated, he believes preventive measures must be put in place. Greenspan wants Congress to clarify the "implicit subsidy" question before the pool of associated investments grows even larger. While the agency-debt market appeared to have shrugged off the chairman's remarks, Informa says traders are nervous and are keeping track of what his comments may portend going forward. Analyst Erik Eisenstein, who follows Fannie and Freddie for Standard & Poor's Equity Research, doesn't think a workable consensus exists to reduce Fannie's and Freddie's implicit subsidy, though there's a stronger consensus for tighter regulation, possibly with the power to raise capital requirements. What he didn't say: S&P's Eisenstein thinks it's a "slight positive" for the GSEs that Greenspan chose not to focus on the ongoing accounting controversy at Freddie -- which Eisenstein would see as a call for immediate action -- and instead homed in on the "less politically viable" subsidy issue. Next up: The markets are bracing for Greenspan's Feb. 25 testimony to the House Budget Committee about the economic outlook. The Fed chief is likely to be "guardedly optimistic," according to Standard & Poor's MarketScope. Informa says Greenspan is likely to offer predictions of eventual robust job growth, while suggesting "patience" until that prediction is realized -- nothing new there. But, notes informa, any twists on Greenspan's basic story could pose a risk for the markets. Monday, Feb. 23 Greenspan spoke before the Credit Union National Assn. 2004 Governmental Affairs Conference What he said: "Elevated bankruptcy rates are troubling because they highlight the difficulties some households experience during economic slowdowns. But bankruptcy rates are not a reliable measure of the overall health of the household sector because they do not tend to forecast general economic conditions, and they can be significantly influenced over time by changes in laws and lender practices. "Delinquency rates may be a bit better measure of the overall health of the household sector. The recent experience with some delinquency rates has been encouraging, with rates falling for several measures of credit-card and automobile debt. "Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress. And, in fact, during the past two years, debt service ratios have been stable." What it means: Greenspan has held to the view that the U.S. household sector seems to be in good shape throughout the recession and into the recovery. He sees no stress on household finances indicated by the rise in household debt levels, nor does he see elevated credit-card use as a sign of weakness. He points to mortgage refinancing as a big help to consumer finances and the economy as a whole. And like the rather bland endorsement of the labor market's prospects that he delivered to Congress on Feb. 20, these remarks suggest that Greenspan sees few inhibitions to continued good growth. What he didn't say: The central bank boss didn't mention the performance of household income. That's a measure more pessimistic analysts often use to show the risk to demand from the household sector, Informa says. Next up: On Tuesday, Feb. 24, Greenspan speaks before the Senate Banking and the House Urban Affairs committees. According to Standard & Poor's MarketScope, he's expected to reaffirm his support for a new regulator with more sweeping powers than the Office of Federal Housing Enterprise Oversight to oversee government sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. Such powers would include raising minimum capital requirements, a move neither the Bush Treasury nor the GSEs themselves support, according to Informa. Another issue is whether such a new regulator should be housed outside the Treasury Dept. as an independent body. For the most part, questions from lawmakers in the Q&A portion of Greenspan's testimony are likely to be restricted to GSE governance, rather than monetary-policy issues.
 Edited by William Andrews All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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