Lapas attēli
PDF
ePub

Chairman SHELBY. Can you speak into the mike just a little more?

Mr. RAINES. Yes, sir. So, for example, on the far left it indicates that if you match your holdings of mortgages with 80 percent callable debt, you can reduce the capital requirement down to about 1 percent, which gets you down at the same level as credit risk.

On the other hand, if you finance your mortgage assets, as most banks do, by short-funding, using primarily deposits, you need 10percent capital.

So how much capital you need to have depends on how much risk you have. Typically, Fannie Mae has a duration match and 50-percent callable debt, which requires us to have about 3-percent capital. However, if we change the risk, the capital requirement would go up.

Chairman SHELBY. But a world-class regulator, if we create one through legislation, would hopefully know all this, would they not, when they are assessing the risk that you are taking?

Mr. RAINES. They would hopefully know it.

Chairman SHELBY. Otherwise, if they were not up to the job, they would not know, but the kind we are trying to create or hopefully would create would understand these risks. And if they understood these risks, it would help them understand who they are supervising better, would it not?

Mr. RAINES. Yes, sir, I think it would help. But we have the example that the banking system to this day does not have a capital standard that takes into account interest rate risk. There is no interest rate risk included in the Basel standard that we have. Nor is there interest rate risk included in the proposed Basel standard.

So this capital standard that we have is actually quite unique as being the only one that captures credit risk and interest rate risk and operations risk.

Chairman SHELBY. So why do the GSE's—I will just speak to Fannie Mae first and then call on the others—hold mortgages in the portfolio? Is it because you have a better return? There is a reason why you hold them rather than securitize them.

Mr. RAINES. Well, actually, Mr. Chairman, the reason that Fannie Mae holds them is the first thing we did as a company was hold mortgages.

Chairman SHELBY. I know that.

Mr. RAINES. When we were founded in 1938, until the 1980's, that is all we did. But our research shows that for the incremental billion dollars of securitization versus a billion dollars of purchases by our portfolio, purchases by the portfolio have a 30-percent greater impact on lowering interest rates. And it is simple to understand. It introduces new demand into the market that otherwise would not be there. People who invest in our debt have chosen that they do not want to invest in mortgage-backed securities. So we actually attract more investors into mortgages than would otherwise be there.

So it is pretty clear from our research that the portfolio has a bigger impact on reducing interest rates than our securitization program.

Chairman SHELBY. But the holding of the debt in your portfolio causes great concern to Chairman Greenspan, for whom we all have a lot of respect.

Mr. RAINES. As do I.
Chairman SHELBY. As far as risk.

Mr. RAINES. As do I, although I found it curious that although banks are the largest holders of mortgages in portfolio, and although banks have the highest ratio of mortgages on their books today that they have ever had and have been growing at the fastest rate that they ever have, that was not mentioned, even though banks do not hedge interest rate risk and Fannie Mae and Freddie Mac do.

So, I found that a curious point that the companies who, in fact, hedge the risk were viewed by the Chairman as being more risky as compared to banks who do not.

Chairman SHELBY. I am sure we will get into that when the Chairman comes back. He spends a lot of time up here.

[Laughter.]

Mr. Raines, back in the early 1980's, it is my understanding that Fannie Mae experienced some problems with mortgages it had bought in portfolio. Didn't they encounter some difficulties during the early 1980's? And wasn't securitization viewed as a positive means to ensure that interest rate risk was not entirely concentrated with the GSE holding a mortgage portfolio? I think in your own organization you had some problems.

Mr. RAINES. Two things happened, Mr. Chairman. In the early 1980's, Fannie Mae operated like a big S&L. It borrowed short and lent long. And, fortunately, unlike the S&L's, it learned the lesson in time and was able to convert. And it did two things. One, it created the mortgage-backed securities program that gave it the ability to have an alternative execution. But the second and most important thing it did was create callable debt that allowed Fannie Mae to have liabilities that matched up with its assets.

And so it was those two innovations, not just the securitization but the creation of a large, liquid, viable, callable debt market that matched up with the mortgages that allowed us to move forward with an on-balance-sheet portfolio.

Chairman SHELBY. Mr. Syron, I will ask you this question, and then see whether the others have any comments. Chairman Greenspan also said yesterday most investors have apparently concluded that during a crisis the Federal Government will prevent the GSE's from defaulting on their debt, the so-called implicit guarantee.

Do you believe there is an implied guarantee backing the creditworthiness of GSE debt? Are you aware of Wall Street analysts making such claims? And if Fannie Mae or Freddie Mac were to become insolvent—which we pray they won't-would the Government have any moral obligation to make the creditors whole?

Now, I am familiar with your background as head of the Fed in Boston, so you bring that experience here. The Fed is the lender of last resort, is it not?

Mr. SYRON. First, sir, to answer your last question first, I am not sure that the Federal Government would have any moral obligation. I think in reality, to answer your question honestly, that financial markets, both domestically and internationally, tend to

know if you disagreed with what each other had to say about this. I know you agreed mostly. And, Mr. Rice, as well, if you have some thoughts on this, I would like to hear them. But if you might give us your concerns with this recommended change that has been raised. And from your perspective what are the problems with providing a future regulator with the ability to place a GSE in receivership? And what are the potential market impacts of such a change?

Mr. SYRON. Senator, if I might just start on this, I think one of the great geniuses that Congress resulted with in creating these GSE's was an ability to transfer interest rate risk, particularly interest rate risk on 30-year, fixed-rate mortgages, from the homeowner to the capital markets.

Now, with the retained portfolio, given international investors' preferences not for mortgage-backed securities but preferences for the actual debt of these institutions, the GSE's, particularly Fannie and Freddie, we have found a way to sell more and more of our debt overseas, thereby shifting the interest rate risk, if you will, from homeowners in the United States to investors in foreign capital markets. And I think that is a substantial gain to the United States at a time when we have a lot of international trade issues, and it is not something that we very lightly want to give up.

I am not implying that there are not issues that have to be faced with this, but I think the best way to facing the issues of the size of our portfolio and the growth of our portfolio is the same way that you deal with the institutions as a whole, and that is, as my colleague said, making sure that you have good capital standards, that you have a very strong regulator, the regulator is able to change the capital standards on a frequent basis if it deems necessary because of change of risk, rather than specifically coming in and saying we are going to bless certain types of obligations and we are going to prohibit other types of obligations.

Thank you.

COMMENTS OF SENATOR PAUL S. SARBANES Senator SARBANES. Did you indicate how much of your debt went overseas in your testimony?

Mr. SYRON. Yes, I think-now, Senator, I will apologize for being relatively new in this, but my understanding and I only know our recent offerings. But in our recent offerings, I think somewhere on the order of about 34 percent has gone overseas.

Senator SARBANES. Of that offering, but how about your total debt, how much of it is overseas?

Mr. SYRON. I would have to get back to you on that.

Mr. RAINES. For Fannie Mae, of our benchmark debt securities, 32 percent are purchased by investors outside the United States. It is a very large part of our funding.

But, Senator Dodd, directly to your question, I think there is a lot of misunderstanding on this issue, and I think there has been a lot of back and forth on the names receiver and conservator. The key things are the powers. Typically, a receiver's major power that is different than other powers is the ability to take a contract and say it is no longer effective. That is the big power. It is able to take lower than the 2.5 percent that we statutorily are required to hold now.

Chairman SHELBY. That is what is causing some of the regulators some heartburn, is not it?

Mr. SYRON. It is causing them a lot of heartburn.
Chairman SHELBY. Lowering the capital standards.

Mr. SYRON. But I think if you look at what Chairman Greenspan said yesterday, you know, that these institutions—and I am new to this, so I am not going to brag on the management of my own organization-have extraordinarily sophisticated hedging systems, extraordinarily sophisticated risk control systems, I mean to the extent where I every day at 5 o'clock, get a whole family of measures on my rim on exactly how we finished the day with respect to our exposure to interest rate risk. We have lots of measures of tests that we are within and whether we are meeting up to what is required. Chairman SHELBY. Senator Dodd, I believe you are next.

COMMENTS OF SENATOR CHRISTOPHER J. DODD Senator DODD. Thank you, Mr. Chairman, and I apologize for stepping in and out of the room here.

First of all, let me thank you, Mr. Chairman. You have done a very fine job—both you and Senator Sarbanes in having this series of hearings on this issue. And I think it has been tremendously worthwhile, so let me express my gratitude to you.

Let me thank all three of you as witnesses. I had a chance to listen to a couple of you talk and express yourselves, as well as read your testimony. And we thank you for it and for your ideas and suggestions.

I would just briefly say, Mr. Chairman, obviously like most of us here this is one of the great success stories of all time, and we do not want to lose sight of that. And as has been pointed by all, by our witnesses here, obviously the 70 percent of Americans who own their own homes today in no small measure due to the work that has been done here, and that should not be lost in this debate and discussion. And I think the points that have been raised by our witnesses emphasize that, and I certainly want to associate my own thoughts and feelings with those comments. And looking at how we can regulate these institutions in a way that will complement their jobs and the goals desired here is something we should embrace with a sense of caution, and I emphasize that word, that we do not do it in a way with a sledgehammer when a scalpel may be the appropriate tool so that we get maximum benefits out of these institutions rather than doing great damage to what has been one of the great engines of economic success in the last 30 or 40 years. So I thank them.

I do not know if you have raised this question while I stepped out of the room. If you have, then I will just step back. I heard Mr. Syron talking about it, and I know Frank Raines raised it as well, and that is the issue of receivership versus conservatorship. And Í do not know if the question has been raised or not.

Chairman SHELBY. That is a good question, and timely, too.

Senator DODD. Why do not you just walk us through your concerns again? I heard briefly what you had to say, and I do not know if you disagreed with what each other had to say about this. I know you agreed mostly. And, Mr. Rice, as well, if you have some thoughts on this, I would like to hear them. But if you might give us your concerns with this recommended change that has been raised. And from your perspective what are the problems with providing a future regulator with the ability to place a GSE in receivership? And what are the potential market impacts of such a change?

Mr. SYRON. Senator, if I might just start on this, I think one of the great geniuses that Congress resulted with in creating these GSE's was an ability to transfer interest rate risk, particularly interest rate risk on 30-year, fixed-rate mortgages, from the homeowner to the capital markets.

Now, with the retained portfolio, given international investors' preferences not for mortgage-backed securities but preferences for the actual debt of these institutions, the GSE's, particularly Fannie and Freddie, we have found a way to sell more and more of our debt overseas, thereby shifting the interest rate risk, if you will, from homeowners in the United States to investors in foreign capital markets. And I think that is a substantial gain to the United States at a time when we have a lot of international trade issues, and it is not something that we very lightly want to give up.

I am not implying that there are not issues that have to be faced with this, but I think the best way to facing the issues of the size of our portfolio and the growth of our portfolio is the same way that you deal with the institutions as a whole, and that is, as my colleague said, making sure that you have good capital standards, that you have a very strong regulator, the regulator is able to change the capital standards on a frequent basis if it deems necessary because of change of risk, rather than specifically coming in and saying we are going to bless certain types of obligations and we are going to prohibit other types of obligations.

Thank you.

COMMENTS OF SENATOR PAUL S. SARBANES Senator SARBANES. Did you indicate how much of your debt went overseas in your testimony?

Mr. SYRON. Yes, I think-now, Senator, I will apologize for being relatively new in this, but my understanding—and I only know our recent offerings. But in our recent offerings, I think somewhere on the order of about 34 percent has gone overseas.

Senator SARBANES. Of that offering, but how about your total debt, how much of it is overseas?

Mr. SYRON. I would have to get back to you on that.

Mr. RAINES. For Fannie Mae, of our benchmark debt securities, 32 percent are purchased by investors outside the United States. It is a very large part of our funding.

But, Senator Dodd, directly to your question, I think there is a lot of misunderstanding on this issue, and I think there has been a lot of back and forth on the names receiver and conservator. The key things are the powers. Typically, a receiver's major power that is different than other powers is the ability to take a contract and say it is no longer effective. That is the big power. It is able to take

« iepriekšējāTurpināt »