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Committee on Financial Services

United States House of Representatives

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The Committee on Banking and Financial Services
U.S House of Representatives, 105th Congress
James A. Leach, Chairman

Phone: (202) 226-0471 Fax: (202) 226-6052 Internet:

For Immediate Release                                              
Thursday, July 24, 1997Andrew Biggs 226-0471

Statement By
Rep. James A. Leach
Chairman, House Banking and Financial Services Committee
Hearing on GSEs Regulation

Government-sponsored enterprises were created by Congress to correct certain gaps in our economic system. Congress judged that filling these gaps would serve a social purpose and granted GSEs certain advantages to help them succeed.

The so-called housing GSEs -- that is, Fannie Mae, Freddie Mac and the Federal Home Loan Bank System - were created to facilitate home ownership in America. They have succeeded brilliantly in this task. But their very success raises questions whether, having largely fulfilled their mission, they are now abusing their privileges in pursuit of narrow, self-serving objectives.

The privatization of profit, coupled with the socialization of cost and risk of Fannie and Freddie, underscore that what is at issue today is not merely the safety and soundness of GSEs, but the competitive fairness of these institutions and the public benefit derived from their government-granted privileges.

On April 10, I wrote a letter questioning Freddie Mac long-term investments. Two weeks later, I received a rambling, virtually unintelligible response from Leland Brendsel that raised more questions than it answered.

HUD Secretary Cuomo made a similar request of Freddie Mac, and the answer he received, and shared with me, was but largely perfunctory. I don't know if HUD was satisfied with it. I am not.

As a result, I have come around to the view that a thorough analysis is needed not only of Freddie Mac's long-term investment practices but of its short-term portfolio as well.

Freddie Mac has argued that the rationale for its short-term investments is liquidity to meet its obligations and be ready to take advantage of favorable turns in the market. But when short-term investments are more than 10 times capital, it strikes me that there may be an abuse of powers on the short-term side as well.

Once institutions have transformed their role from being a secondary market serving a tertiary market to enterprises that increasingly hold investments in their own name, the case for short- or long-term arbitrage to meet liquidity needs disappears. In investing in short- or long-term bonds in this circumstance, Freddie Mac is, in effect, using resources provided through socialized governmental rights for the pursuit of maximizing shareholder returns. It is any wonder that Fannie's profit per employee, as recently calculated by FORTUNE magazine, at $826,000, is nearly four times the per employee profit of General Re, the leading purely private company in that measurement? Freddie Mac, $388,000, is a distant second but still $149,000 above General Re, the re-insurance company.

There is a case for GSEs to receive government support if they serve a public need - that is, markets private businesses are not properly serving, which also implies that the GSEs not compete at the retail level. But increasingly the practices of Fannie and Freddie are turning these institutions into what in effect are national S&Ls, and their duopoloy of power is putting great and unfair pressure on many private companies that serve housing needs.

HUD has a responsibility to monitor the mission of the GSEs and a responsibility to work with Treasury to assess the ramifications of GSE intrusion into the private markets.

The goal should to enable the private sector to serve customers and the public without crowding out the private sector in the process. The problem is that GSEs which become retail institutions have the effect of undercutting virtually all other private sector providers.

Among the numerous advantages the housing GSEs have been granted by Congress, including the right not to pay state taxes, one has received little attention: the government-imposed capital standards on these two GSEs are approximately one quarter the Basle standards. In other words, Fannie and Freddie can have assets four times those of a private sector company for each invested dollar.

In the economic news this week were the adjustments Boeing has had to make to win the approval of European antitrust authorities for its merger with McDonald Douglas. If present trends continue, Fannie and Freddie will push out all private sector competition and become the Boeing and Airbus of the S&L industry.

I would like to propose today that the Administration establish an inter-agency committee, perhaps led by the Treasury, to review the activities of all GSEs and determine whether they are hewing to their mission or abusing their governmental powers, whether they are serving the private retail sector or pre-empting it. We need a sustained and probing analysis to bring these run-away enterprises back to their roots.



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