Lapas attēli
PDF
ePub

How can this black-box underwriting be considered to support liquidity? Doesn't a liquid market need a significant degree of transparency?

Chairman GREENSPAN. Senator, there is a problem here in the fact that these are private organizations, and that is private property, and they have developed it in a manner which they perceive to be of value, and I think one has to argue that it is clearly a significant value for these institutions.

I think the issue that comes up is with respect to the question of transparency, largely because of this very ambiguous relationship with the GSE's, but in my judgment, so long as it is private property, it belongs to the GSE's and should not be made available except under extraordinary circumstances, and I think that is one of the issues which I think is on the table.

Senator DOLE. Thank you, Mr. Chairman. I think my time has expired.

Chairman SHELBY. Thank you, Senator Dole.
Senator Reed.

Senator REED. Thank you very much.

Thank you, Chairman Greenspan. Mr. Chairman, is there anything that we should do to make it clearer that the full faith and credit of the United States is not behind the operations of these GSE's, because much of our discussion this morning rests upon this subsidy of some kind, and yet and I hope you can enlighten meit appears that we have taken steps, at least legally, to try to make it clear that these agencies will not be supported by us. I mean, there is always the hypothetical, but what more can we do I guess is the question.

Chairman GREENSPAN. I think that there are innumerable ways to do that. A basic problem that we all have is that when somebody-a Government official or even groups of people in the Congress-may stipulate that that will not happen, they do not believe you, because they believe that in the event of a crisis, in effect, the Federal Government will not allow the institution to go into receivership.

I presume there are ways in which the Congress can pass a law that prohibits it or does something, but you have to be a little careful because what you do not want to do is inhibit any forms of activity which are required in the event of a crisis.

For example, we are the lender of last resort. In the event of a crisis of a major institution which we think were it to liquidate very quickly could create systemic instability, we will endeavor to find a way to liquidate it gradually, unwind the whole operation, obviously eliminate all shareholders value and perhaps even create some haircuts to the debt itself. But that process is necessary in order to prevent a shock to the system and a destabilization.

So it is not an easy issue to resolve, but I do think that in the wisdom of the Congress, you will find a way, if that is your desire, to make that clear and in effect, perhaps, in the way in which the receivership issue gets handled in the new regulator, convey that implicit in that are potential haircuts to debt.

Senator REED. As an aside, perhaps, but is your policy that you have just announced with respect to institutions that you govern

reflected in their equity prices and their ability to go to the market and receive the more preferential rates?

Chairman GREENSPAN. Do you mean is our general policy

Senator REED. For a large money center bank, do you think it is reflect there as you suggest it is reflected in the ability of Freddie and Fannie to go to the equity markets and the debt markets?

Chairman GREENSPAN. For Fannie and Freddie, it is very clear that it is reflected. If you look at the prices of debt of some major commercial banks, you see some of it, but far less. In other words, senior debt on the part of the major banks has higher yields than senior debt on the part of Fannie and Freddie. And the reason for that is largely there is a different view. While there is a Federal safety net for our depository institutions, the market does not view that debt as risk-free, essentially, and as a consequence requires a higher yield than the market requires of Fannie and Freddie.

Senator REED. Let me turn to a question that I raised in my opening statement. This goes to how we can support policies for better, more affordable housing-not just homeownership but multifamily housing that provides for citizens who cannot yet afford a house.

What I think you have been saying is that there is an implicit subsidy because the market reads what we do or thinks that we will step in at the last minute. This implicit subsidy is not fully passed through to achieve the goals that we have outlined-homeownership, expansion of those opportunities. Do you think as a matter of policy it would be appropriate for us to somehow recapture some of that undistributed benefit for housing programs?

Chairman GREENSPAN. I think that is an issue for Congress to make a judgment on. In other words, I am not against private institutions making a profit. I feel uncomfortable when their profit is made by subsidies. And I am not in a position to make a judgment as to where the Congress draws the line, but in this case, I will say, and I have said many times in the past, I do not think it is wise for this very odd situation to continue indefinitely, namely, that the markets believe that the Government will do one thing, the Government says it will not, and down the road eventually from that point of view is a very serious financial problem.

So clarification of this question I think is very important. If the Congress decides that it is perfectly all right for a significant part of the subsidy to go to shareholders, that is a judgment for the Congress to make.

Senator REED. And on the contrary, some of that subsidy should be returned in some way into the marketplace for homeownership-is that a legitimate judgment also?

Chairman GREENSPAN. Sure.

Senator REED. Thank you.

Chairman SHELBY. Senator Crapo.

Senator CRAPO. Thank you very much, Mr. Chairman.

Chairman Greenspan, I have a number of issues I want to try to get into, so I will try to move as quickly as I can through them. But first, before I get into the capital requirement issue, I noted in your testimony that you have stated that the Federal Home Loan Banks are not the focus of your testimony today but that

much of what you have to say today applies to them as well. In fact, you say that because the Federal Home Loan Banks can design their advances to encompass almost any type of risk, they are even more complex to analyze than the GSE's.

As you know, we are looking at establishing a new regulator. If such a new regulator were established, do you believe that the Federal Home Loan Banks as well as the GSE's should all be under the same regulator?

Chairman GREENSPAN. I do, Senator.

Senator CRAPO. With regard to the capital standards, in your testimony you state that "Determining the suitable amount of capital for Fannie and Freddie is a difficult and technical process, and in the Federal Reserve's judgment, a regulator should have a free hand in determining the minimum and risk-based capital standards for these institutions."

Do you believe that in any legislation we establish, we should stay away from establishing a capital standard but instead set the risk-based factors or at least get some kind of policy analysis so that the regulator is involved in setting both the minimum and the other risk-based capital requirements?

Chairman GREENSPAN. Senator, I think that the way it is handled for depository institutions is the model that I think should be followed, which is there is a generic authority given to the regulator. For example, we have as you know under FIDICA a set of catgories which the Congress put in legislation not in numbers but in the nature of where we should be putting various different sorts of numbers. I believe the 2 percent is statutory. But there is very considerable discretion on the part of regulators as to where we then essentially translate the notions expressed by the Congress in legislation into numbers, and those numbers will change from time to time, as indeed they should.

So, I would say you could do worse than just take a look at the statutes which you enable us to function under.

Senator CRAPO. Thank you.

With regard to your testimony, you also indicated that the leverage which Fannie and Freddie now are able to utilize would not be possible without the expectation of a Federal guarantee. Do you believe that the current capital standards that Fannie and Freddie operate under are too low given the risk that is being incurred?

Chairman GREENSPAN. Senator, it is difficult to make a judgment, and let me express why. There is a tradeoff in interest rate risk or management. It is, as I indicated before, theoretically possible to so create a hedge structure that you fully eliminate all interest rate risk, and then, all you are dealing with is credit risk. And there is no question that mortgages per se are fairly safe instruments.

My own suspicion is that there is likely to be some increase in capital requirements if you have a regulator, largely because it is very difficult to get what we call "convexity hedging" as the result of a tendency in a big refinance boom for problems to arise.

The general issue is that you can create a very significant hedge but not without very significant cost. So that there is a tradeoff here between the cost that the GSE's are willing to expend, effec

tively, to get zero duration gap, and appropriate convexity hedging, and the issue of capital. There are tradeoffs.

So it is conceivable to me that Fannie and Freddie could set up a set of hedges which would require very little capital to be supported. But remember, crucial here is the fundamental question which comes first-is the Federal Government going to stand behind those instruments?

If indeed the Federal Government is going to guarantee the debentures of Fannie and Freddie, the required capital is called "zero"-you do not need any capital under those conditions.

Senator CRAPO. Thank you. That leads to the last question I wanted to ask. I would like to into a lot more on the capital, but I just have one last question to ask, and that is, assuming that it would be the policy of the Congress to make it clear that the Federal Government was not providing a guarantee and that we were to do something in any legislation to try to clarify that, I am struggling with exactly how we would effectively do so.

For example, we could put language in the statute that said the Federal Government will not guarantee the insolvency of Fannie and Freddie, but there would still, it seems to me, be a perception

Chairman GREENSPAN. They will not believe you.

Senator CRAPO. Yes. That is the point. I mean, we can say it in the statute, and we could even put "and we really mean it," but the question is how do we actually make it clear that this Congress will not back?

Chairman GREENSPAN. I think the only way to do it-and I am not necessarily recommending this, because I think it is a very sensitive issue in the marketplace would be if you were to clarify how one would actually create a receivership and what would happen to the various holders of debt and equity and various other instruments, how they would be handled in advance, it might actually create a greater reality than I think merely a firm stipulation that you will not do anything would carry.

Senator CRAPO. Thank you. I look forward to working that out in a little more detail with your thoughts on that, and perhaps we might even find some procedural mechanisms to put into place that would require a super-majority vote in Congress. But I am not even sure we could pull that off. So, I thank you for those thoughts. Chairman SHELBY. Senator Stabenow.

STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman, and welcome, Chairman Greenspan.

First, I would just indicate to you, Mr. Chairman, that given the comments about the importance of downpayments in terms of helping in homeownership, I would just point out that Senator Gordon Smith and I have for some time introduced a first-time homebuyers' tax credit that we believe is substantial and would help homebuyers, and we would welcome the opportunity to bring it up before the Committee and have the opportunity to debate and pass that legislation.

Before questions, I do have an observation, though, Mr. Chairman. I have watched as a member of the Budget Committee and

had the honor of hearing you on a number of occasions on the Budget Committee as well as before this Committee debating the importance of paying down debt and the relationship to interest rates and the fact that we know, even during difficult economic times that it has been the housing market that has in large part sustained us because of low interest rates.

So, I find it interesting and surprising that now we would be saying today that interest rates do not matter that much for people, when I truly believe that in the situation that we have been in, and the challenging times economically, in fact the actions of your agency and the low interest rates and the housing market, the refinancing, the purchasing of new homes, has been a substantial part of driving the economy and helping people into homeownership.

I am surprised to hear you say somehow that interest rates do not matter, or that somehow the ability for Freddie Mac and Fannie Mae to make a difference on interest rates would not make a difference. Certainly it makes a difference in the monthly payment I know that I make, and I look very closely, as my constituents do, at the interest rate and how it relates to the payments that they have to make in order to buy a home.

Chairman GREENSPAN. I think you are raising an important issue which probably should have been discussed earlier.

All the evidence that we have suggests that the types of interest rate changes that really matter are not basis points but percentage points. In other words, you really need 1 or 2 percentage points' change to really change the overall outlook.

There is no question, though, that any small change in interest rates does affect the monthly payment that people make on their mortgages. But I want to point out that to the extent that that decline is the result of a contingent liability that might be arising because of a subsidy, the homeowner as taxpayer is actually taking on a commitment which is probably as large in some cases and under certain assumptions larger than the benefits that they would get from the lowered monthly payments.

There is no question that lowering interest rates-for example, all the refinancing that we went through-had a very important impact on consumer purchasing and on the basic economic wellbeing of the average American household. But all of our analysisand we have done this for years, and so has everybody else suggests that you really need far greater decreases in interest rates than 25 basis points, for example, to have a significant impact on either homeownership or on home construction.

Senator STABENOW. I appreciate you clarifying that, because I do believe that in fact what you are saying is true in terms of interest rates and the importance of interest rates.

I do have a question regarding the Passmore analysis in looking at this more closely and the really startling assertion that the GSE's do not contribute a significant rate difference between conforming and jumbo mortgages.

I notice that in the study-which admittedly is very complicated, as you have said; it is a complex economic exercise-Mr. Passmore's study concedes, though, that "These data are not up to the tax of measuring the GSEs' effect on mortgage rates precisely."

« iepriekšējāTurpināt »