Quote:
"these estimates suggest that the reduction in conforming mortgage interest rates stemming from the GSEs falls well short of their funding advantage. The Congressional Budget Office estimates that only about half of the total subsidy provided to the GSEs gets passed on to homebuyers. What happens to the rest of the subsidy? The outcome is exactly what one would expect with a private company—it goes to executive compensation and to shareholder profits.
This situation raises concerns over fairness, but in my view, the larger issue for the policymaking and regulatory community is that the subsidy creates a source of systemic risk for our financial system. This risk arises because the subsidy has allowed the GSEs to become gigantic. From 1995 to 2002, the debt issued by the housing GSEs more than tripled. As of the end of 2002, their total reported debt was $2.2 trillion. To put this in perspective, the privately held debt of the federal government is $3.2 trillion. If recent trends continue, GSE debt will soon exceed the privately held debt of the federal government...
The available information suggests that the housing GSEs place a high priority on risk management. To date, their efforts appear to have been largely successful. However, policymakers must not be complacent. In our complex and dynamic financial system, even small errors can damage an institution’s financial health. And the size and complexity of the assets and operations of the GSEs mean that it is hard even for the companies themselves to keep track of their own situations. What is worrisome is that investors might accept lack of transparency in financial information because they are assured by the implicit public guarantee...
The enormous size of the mortgage-backed securities market means that any problems at the GSEs matter for the financial system as a whole. This risk is a systemic issue also because the debt obligations of the housing GSEs are widely held by other financial institutions. The importance of GSE debt in the portfolios of other financial entities means that even a small mistake in GSE risk management could have ripple effects throughout the financial system.
There is no way to fully eliminate the underlying risk. It is possible, however, to reduce the risk by ensuring that the housing GSEs are overseen by an effective regulator. The current regulators do not have the tools, or the stature, to deal effectively with the current size, complexity, and importance of the housing GSEs.
The Administration believes that legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk. A key issue is providing appropriate resources and tools. Inadequate reforms could conceivably increase systemic risk. The appearance of greater oversight without the reality would be a step in the wrong direction."
Sounds like Bush was warning of the need for more oversight to lessen the risk and avoid a systemic collapse of the financial system early on to me. So how did Democrats respond?
Quote:
Maxine Waters: Through nearly a dozen hearings, we were frankly trying to fix something that wasn’t broke. Mr. Chairman, we do not have a crisis at Freddie Mac, and particularly at Fannie Mae, under the outstanding leadership of Franklin Raines.
Gregory Meeks: … I’m just pi$$ed off at OFHEO [the regulators trying to warn Congress of insolvency at the GSEs], because if it wasn’t for you, I don’t think we’d be here in the first place. … There’s been nothing that indicated that’s wrong with Fannie Mae, Freddie Mac has come up on its own … The question that then comes up is the competence that your agency has with reference to deciding and regulating these GSEs.
Lacy Clay: This hearing is about the political lynching of Franklin Raines.
Barney Frank: I don’t see anything in this report that raises safety and soundness problems.
