Lapas attēli
PDF
ePub

My question is given the fact that he is admitting the complexity and that they have not been up to the task of measuring the effect precisely, this would suggest that the information is possibly incomplete or possibly inaccurate.

The question I would have is why would we assume, then, that his conclusions are absolutely accurate and complete.

Chairman GREENSPAN. The answer, Senator, is we do not. And we do something different. You are dealing in this particular area with very complex sets of relationships, and we have a number of very sophisticated statistical techniques which enabled us to get a model of how these markets function and, if we have data that is appropriate and accurate, interrelationships amongst various variables.

By the very nature of the way we do it, we cannot precisely estimate anything, but we get ranges. I mean, for example, one of the criticisms on this came from Dr. Greene at NYU the other day, and I read his piece, and it is a very interesting piece. It demonstrates that certain of the relationships create errors in the way the calculations are made. And I could add four or five myself as to what assumptions are made.

But what we do know is that in the very broadest sense, that even with all the errors, of which there are many, we can get a judgment of what is accurate.

For example, when everybody says about the Passmore study that, oh, it is incorrect here or incorrect there, or it does not do this or it does not do that, I am waiting for somebody to come up with an alternate model. It is one thing to say, well, this is not necessarily the case-and I would say, absolutely. But I would argue, for example, there is this very serious question as to what proportion of the subsidy flows through to the homeowner. And the argument is is it, say, 7 basis points, 10 basis points, 12-the point at issue is what is the probability that all of the subsidy goes through to the homeowner. And I will tell you that approaches

zero.

In other words, we do not know exactly what the pass-through is-or, as Dr. Greene focuses on in his paper, the so-called "omega parameter" in Passmore's study-but we know with a high degree of probability that it is within a reasonable range, and that range essentially says that the proportion of the subsidy that flows through to the homeowner is far less than I suspect is conventional wisdom as to what happens in the world.

So while it is certainly the case that all of these models are weak, in one form or another, they are very robust with respect to answering the question, in what range do these numbers tend to fall, as distinct from what the specific number is.

I would suggest-and indeed, we are very thankful that people are trying to address this issue; I find that I am quite pleased that everybody is trying to help us-I ask, in addition to them helping us, instead of just saying this could be wrong, this could be wrong, this is likely to be in error, to come up with a system which is an alternative way of looking at the same problem and demonstrating that the conclusion, the generic conclusion that is made in the Passmore piece, is wrong.

And I will tell you if they do that, we will be the first to say, "Congratulations. That is a remarkable piece of analytical work." I am waiting.

Senator STABENOW. Mr. Chairman, if I might just quickly ask one other issue, because I think there is another important piece of all that. That is, as we are talking about the benefits of the GSE's, we also give them responsibility, we also give them affordable housing goals, we also set up certain criteria for them—and, as you are suggesting privatizing on the one side, of course, then the question is will in fact those goals be able to be met on the other side, and wouldn't eliminating the Government sponsorship and eliminating the affordable housing goals redirect capital in the second market toward loans that are easier to make. Often, these are difficult goals to achieve, and there are public purposes for it, which is why we have the GSE's in the first place, and I would have a real concern about whether or not capital would be redirected in the secondary market without this relationship.

Chairman GREENSPAN. I understand your concern, but we have the Federal Housing Administration, they come directly at the issue of homeownership by effectively getting downpayments down. I am not sure that there are not a whole series of alternate means to enhance homeownership.

I think that the GSE's, whether private or not private, are exceptionally well-structured to maintain a viable secondary mortgage market, which is an extraordinarily valuable asset in this country. The issue of the impact on homeownership is far more directly done by other means. If, for example, these institutions were privatized, I think that you are quite right, they would not and should have as a private organization any requirement of homeownership responsibility. But I do believe there are innumerable other vehicles to do that. They are not the only ones to do it, and actually, I am not sure that that is an efficient way of doing it.

What they do is a very efficient way of maintaining a viable, deep, and liquid mortgage market which has great importance beyond housing. But I would never consider that that particular economic structure is well-suited or best-suited for the purpose of enhancing homeownership.

Senator STABENOW. Thank you.

Chairman SHELBY. Senator Sununu.

STATEMENT OF SENATOR JOHN E. SUNUNU

Senator SUNUNU. Thank you, Mr. Chairman.

Mr. Greenspan, oftentimes going last means we get a choice to either ask you strange questions that have not yet been asked or just to make you repeat the good stuff, so bear with me here as I try to add something to this discussion. And I know that you want to talk more about "convexity" and "omega," but I do not understand any of that.

I do understand a little bit about risk, though, and you spent some time talking about an ideal world where these GSE's could hedge all of their interest rate risk. It would be expensive, but they could do it.

Now, even if that were accomplished, is it still the case, however, that they would maintain credit risk, and they would maintain pre

payment risk and therefore need to have some minimum capital that is regulated by the regulator that we have been talking about? Chairman GREENSPAN. Well, they can with difficulty hedge prepayment risk. It is expensive, and it is a little tricky, because it sometimes requires that you get in what is called "delta hedging" and complex types of hedging instruments, and they do not always work, as indeed we have found out in the last year. A number of organizations tried to hedge their interest rate risk and largely failed.

But it is possible to take out numbers of different types of hedges. There are difficulties in the event of a crisis where you could get both Fannie and Freddie trying to get the same type of hedge in the same market, and it may be difficult to do. But that is a technical question.

All I was trying to stipulate was that capital is not the sole criterion to essentially cover interest rate risk and that credit risk as such is indeed rather small in the holding of mortgage assets, and the amount of capital required for that is clearly lower than C&I loans or credit card debt or something of that nature.

I was merely raising the issue of these without talking about what degree of hedging you have succeeded in doing, the determination of what is the appropriate amount of capital for interest rate risk is not determinative.

Senator SUNUNU. It is my understanding that roughly 60 percent of the country's banking institutions hold at least half of their equity capital in GSE debt. Is that a number that you agree with, and to what extent does that contribute to some of the concerns of systemic risk that you discussed in your testimony?

Chairman GREENSPAN. It is a large number. I do not know whether it is the explicit number. My concerns are not related to that per se. In other words, my concerns are that if we stabilize the system and create an overall model which can go forward over the longer-term, there is no reason to believe that those particular instruments are in any way open to question.

But I think the major issue is to focus on where the current relationships will lead us if we do not change direction.

Senator SUNUNU. Doesn't the degree to which our financial institutions depend on these securities as a part of their equity capital make getting this regulatory structure more important?

Chairman GREENSPAN. I think that here is where supervision really matters. That is, every one of the banks are scrutinized with respect to what they have and where their concentrations are, and I think there are lots of discussions that go on between bank supervisors and the officers of the commercial banks. My judgment is that there is a considerable amount of effort on the part, I know, of our supervisors to be fairly vocal on the question of concentration of risk within particular institutions. And I suspect, but I do not know in detail, that that issue is up front, discussed, and evaluated and the risks understood, I believe, by both the regulators and the banks.

Senator SUNUNU. You described a second business, two businesses, that the GSE's are engaged in. The second business you described as one where the GSE's hold mortgages or mortgage-backed securities on their books that are paid interest at market rates,

and they finance the purchase of that portfolio with their own debt, which is discounted because of the implied subsidy that we have been talking about. That is a good business. What would you call that business? Is it fair to call that a form of arbitrage?

Chairman GREENSPAN. It is a perfectly sound business, and a lot of organizations engage in it. My only concern is that there is a subsidy in the liability side of the balance sheet.

Senator SUNUNU. Is it fair to describe that business as arbitrating their implied subsidy?

Chairman GREENSPAN. No.

Senator SUNUNU. Or, their implied guarantee.

Chairman GREENSPAN. Well, I do not know if the word "arbitrage" is the right term there. What they are doing is very simple. They are borrowing money, and they are investing it, and that is a financial intermediation activity. Arbitrage is usually related to differences between prices, but here, it is just a big, fat gap which they can use.

Senator SUNUNU. There is a subtlety there that escaped me, but I think the point was made.

You suggested that that business, that second business, does not contribute to homeownership rates. Is that a fair characterization? Chairman GREENSPAN. I would be surprised if anybody could demonstrate that it had a significant impact on homeownership. I am waiting to see the evidence. I have seen none.

Senator SUNUNU. Would you recommend by extension any absolute limits, limitations, on the size of the portfolio that the GSE's could then hold?

Chairman GREENSPAN. At this stage, I have not given very much thought to that. All I know is where I believe the problem is is right here, and the question is that first a judgment has to be made as to whether in fact the regulator or the Congress or people who are going to be making these judgments believe that that is indeed the case. If that is the conclusion, then, that is a secondary question as to where the appropriate numbers would be.

My own judgment is that the extent of the subsidy increasing should not be at anywhere near the pace that it has been in recent years.

Senator SUNUNU. There is a resolution introduced by Senator Schumer I am sorry he is not here today-and I think it is cosponsored by half a dozen or so Members of this Committee, and in part the language of the resolution states: "Whereas, Chairman Greenspan has provided a steadying hand on policy during periods of great financial risk for America; and whereas, Chairman Greenspan has carefully upheld the responsibility of the Federal Reserve to be unbalanced and impartial in its decisionmaking; and whereas, Chairman Greenspan possesses wisdom and experience and competence in the public"-now, I am sorry to say that I am not a cosponsor of the resolution, but it would seem to me that someone who was to unbiased and impartial and has these great qualities would be an excellent nominee to sit on the advisory board that has been contemplated and discussed in previous hearings for overseeing a new regulator.

Wouldn't those be good qualities to have as a board member exercising fiduciary responsibility and oversight of such an important part of our financial system?

Chairman GREENSPAN. Senator, it would if it were not for the fact that we have a potential large conflict of interest. On the one hand, we are involved in being the lender of last resort and the institution which has been required by the Congress to try to maintain systemic stability. If we were involved, I am fearful that we would have on the one hand the desire to make sure that the GSE's were whole the way all regulators do and we do for commercial banks, but we would clearly be concerned if we thought there were systemic risks involved in the process.

So, I would say we would probably be uncomfortable in that particular role and hope that we are not asked to do so.

Senator SUNUNU. Thank you, Mr. Chairman.

Chairman SHELBY. Thank you.

Chairman Greenspan, you have touched on a number of things here today, and I might go over a few that you have already talked about a little bit.

We do have that ambiguous relationship—that is, the Federal Government-with the GSE's. How do we actually get rid of that ambiguity is a complicated, tricky thing. I do not know how we do it. You have alluded to it a little bit, but how do we define the relationship is important, is it not?

Chairman GREENSPAN. Yes. Of all the issues that have been discussed today, I think that is the most difficult one, because you cannot have in a rational government or a rational society two fundamentally different views as to what will happen under a certain event, because that invites crisis and it invites instability, and invites a conclusion that the Congress will not be able to control unless it moves in advance and defines exactly how this issue will be resolved.

One possibility—and as I said, it is difficult to know exactly how to construct this-is to define what would happen in the event of some form of crisis where you can define the nature of a receivership and who gets what under certain conditions. That would be a difficult thing to do. It would clarify the issue and perhaps clarify enough to remove the ambiguity going forward.

Chairman SHELBY. But there is a heck of a lot of difference between a conservatorship and a receivership. The banking system that we deal with up here every day, they are subject, at least technically, to a receivership. Is that correct?

Chairman GREENSPAN. Correct.

Chairman SHELBY. Now, if we were to create some type of receivership in legislation, you could not just unwind overnightChairman GREENSPAN. No. The problem here

Chairman SHELBY. It is very complicated.

Chairman GREENSPAN. It is very complicated, and you have to be very careful not to undermine the GSE's in the process.

Chairman SHELBY. Because if you did, you could undermine some of the banking system

Chairman GREENSPAN. Absolutely.

Chairman SHELBY. -because the banking system are big investors here; is that right?

« iepriekšējāTurpināt »