Greenspan Wades Into Debate Over Government-Sponsored Enterprises
April 23, 2002
Federal Reserve chief Alan Greenspan says that government supports for such government-sponsored enterprises (GSEs) as Fannie Mae and Freddie Mac are the equivalent of subsidies -- which might be leading investors to underestimate the risk of dealing in their securities.
- Fannie and Freddie are private mortgage corporations that operate under federal charters -- and they enjoy special privileges, including access to a never-used line of credit with the Treasury Department and exemptions from some securities regulations that apply to other publicly-traded companies.
- He views such support as a subsidy to housing that distorts the economy's allocation of resources.
- In a speech last night, he went further and warned that the subsidy may also be causing the risk in their derivatives transactions to be understated -- though he didn't claim that had actually happened yet.
- The perception that the government backs the GSEs could encourage investors to "apply less vigorously some of the risk controls that they apply to manage their over-the-counter derivatives exposures," he warned.
Although the federal government does not explicitly guarantee Fannie Mae or Freddie Mac investments, the perception is that it would come to the rescue with taxpayers' money if they ever got into trouble.
Source: Greg Ip, "Greenspan Criticizes U.S. Subsidies," Wall Street Journal, April 23, 2002; Alan Greenspan, "Finance: U.S. and Global," speech before the Institute of International Finance, April 22, 2002, New York, New York.
For Greenspan speech
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