Nov 11, 2011
Indonesia's Example to the World
Federal President Has a Listening Problem - The idea that government can spend our way to prosperity doesn't make sense to voters
Tuesday Talks: Veterans Day
George W. Bush's Fuzzy Math
Nuclear Regulation in Dynamic Times: A Conversation with NRC Chairman Gregory Jaczko
How About a Partnership Stimulus? - To help rebuild America's roads and airports, let's tap the billions of dollars of private capital looking for safe returns
U.S. Assistance to the Palestinian Authority
The $30 Bonanza - The Supremes hear a major arbitration case. Trial lawyers pant.
Market structure developments in the clearing industry: implications for financial stability
White House Statement on the Initial Bowles-Simpson Bipartisan Fiscal Commission Proposal
Joel Klein's Report Card - If you can reform schools there . . .
Remarks by the President at the University of Indonesia in Jakarta, Indonesia
Wind Jammers at the White House - A Larry Summers memo exposes the high cost of energy corporate welfare
Recovery Through Retrofit
How to Shut Down Fannie and Freddie. By Emil W Henry Jr
The Treasury Department can stop rubber-stamping their debt issuance at any time
WSJ, Nov 11, 2011
Although Fannie Mae and Freddie Mac played a central role in causing the recent economic crisis, they are absent from the reform plans of Congress and the Obama administration. So these two government-sponsored enterprises (GSEs) remain mired in conservatorship, as extensions of the federal government. Bureaucrats now steer the primary provider of secondary market liquidity for our $10 trillion housing finance market.
The administration has offered many explanations for the delay: Housing finance is complex, says Treasury Secretary Tim Geithner, so he's consulting Congress and has assembled "academic experts, consumer and community organizations, industry participants and other stake holders" to review the matter.
But the Treasury doesn't need Congress or an academic assessment in order to tackle the most important reform goal: eliminating the GSEs and moving their activities to the private sector. Mr. Geithner himself can immediately reshape the mortgage markets—by withholding his approval of new debt issuances by the GSEs. That's the best way to begin curtailing the GSEs, and it can be done unilaterally.
Congress chartered the GSEs and in their charters required that the Treasury secretary approve all of their new debt. For decades, the Treasury exercised this duty, and the GSEs submitted each new debt issuance to the department for prior approval.
But the Clinton administration found this process cumbersome and a strain on Treasury staff. It established a new process that weakened the administrative approval process for GSE securities offerings. This hands-off approach represented an abdication of Treasury's essential oversight powers.
The bloating and strategic drift of the GSEs began soon thereafter. Within a decade, there were vast failings in Fannie's and Freddie's accounting, corporate governance and risk management—including the cessation of basic disclosure practices such as annual reports. Even after the Sarbanes-Oxley law, which forced public companies to adhere to a new oversight paradigm, the GSEs escaped with minimal scrutiny. Insolvency was a matter of time.
By the mid-2000s, the GSEs' process of debt approval had devolved to a simple notification of the Treasury, without any formal process of approval. The pace of debt issuance was so rapid that such notifications came to the Treasury weekly, typically on one piece of paper that simply listed proposed issuances without supporting data (such as income statements or balance sheets) upon which to make informed judgments.
If the Obama administration is serious about addressing the GSEs, it should re-establish a rigorous process to review all GSE debt issuance. That process should require the GSEs to provide Treasury with full financial data and justification for issuances, including statistics that show the creditworthiness of the agencies after each offering. In addition, the Treasury secretary should have to approve all new debt issuances personally.
The administration should also announce that in 2012 the Treasury will begin to deny a portion of GSE debt issuances with the goal of reducing their debt 50% by 2015 and 100% by 2018. This eight-year period of adjustment would allow the private markets ample time to provide secondary market liquidity.
There will be a private market ready to absorb the securities currently held by the GSEs. Private companies won't be able to borrow as cheaply as the GSEs could (thanks to their implicit government guarantee), but there will still be plenty of profit left to capture in the market for mortgage securities.
Large banks may be wary of this solution because the federalization of the GSEs has offered them a stable vehicle for off-loading their mortgages. Policy makers, meanwhile, will worry about impairing the recovery if a private market is slow to materialize. But the alternative is keeping the flawed system whereby liquidity depends upon distorted price discovery, permanent subsidization, and the economic judgments of bureaucrats.
To allow Fannie and Freddie to exist in any form—even on a smaller basis—would again give them an unfair funding advantage. Buyers of their debt would again pay up for implicit government support. And, once again, we'd have the market distortions, risk-taking and obscene political patronage that caused so much economic chaos.
Mr. Henry, the CEO of Henry, Tiger, LLC, was an assistant secretary of the Treasury from 2005 to 2007.
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