Who should regulate Fannie and Freddie?
With increased GSE regulation clearly in play, the scramble begins for the right to ride the tiger. Congressional Quarterly (subscription required) has a nifty short article nominating three candidates and giving brief reasons for, against, and who is supporting what.
Of interest are the arguments against each of CQ’s nominees:
· OFHEO: Despite its recent successes, “no one argues that OFHEO should remain as the regulator, or that a new regulator should be located in the Department of Housing and Urban Development.”
· Treasury: “Housing mission might be compromised. Authority of Treasury secretary to review policy statements and budget limits independence.”
· A new agency: “Change might create regulatory and investor confusion. An independent regulator charged with supervising just two companies might become too cozy with them.”
Why not OFHEO — who, after all, blew the original whistle? According to CQ:
To hedge against potential losses, Fannie and Freddie buy and sell complex, unregulated financial instruments called derivatives.
Derivatives played a role in the recent accounting scandals at Fannie and Freddie, and they were central to the collapse of the hedge fund Long-Term Capital Management in September 1998. Uber-investor Warren E. Buffett has called them “financial weapons of mass destruction.”
Federal Reserve Chairman Alan Greenspan has spoken out against the companies’ use of derivatives, and some members of Congress have expressed concern about the ability of any regulator to evaluate how they are used.
“We have now matured to an age at Fannie Mae and Freddie Mac where derivatives are such a protected device used to ensure the viability of these institutions that you can’t afford to have anyone who doesn’t understand them or who makes serious mistakes with them,” said Rep. Paul E. Kanjorski of Pennsylvania, ranking Democrat on the House Financial Services subcommittee that oversees Fannie, Freddie and their regulator.
Whoever gets the regulatory responsibility will automatically gain a short-term political win and a long-term political power base. The struggle is likely to be lengthy, keen, complex, and ultimately political harball.
