A US Treasury department official Henry Henry yesterday reported that the GSEs pose systemic risk, in this Reuter’s article.
WASHINGTON, June 26 (Reuters) – U.S. mortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) pose risks to financial systems that could hit primary dealers, tighten credit and reduce liquidity in markets, a Treasury Department official said on Monday.
“We at the Treasury are confident we are not simply ‘crying wolf,'” Emil Henry, assistant treasury secretary for financial institutions, said in remarks prepared for delivery to a financial services industry group.
Henry said the potential for spillover into financial markets from any crisis at one of the government-sponsored mortgage finance enterprises (GSEs) is “nothing short of breathtaking.”
His comments came as the administration pushes for legislation that would tighten government oversight of the GSEs after multibillion-dollar accounting disasters at both companies. The Treasury Department has said that anything short of a regulator directed by Congress to cut GSE mortgage portfolio size is unacceptable, but some lawmakers disagree.
Henry said risks from GSEs could conceivably match the scale of the 1998 meltdown of the Long Term Capital Management hedge fund.
A deterioration in GSE financial conditions would almost certainly increase risk premiums and boost yields on GSE debt and mortgage-backed securities relative to Treasury yields and other benchmarks, he said.
Primary dealers holding large positions in GSE debt or mortgage-backed securities could incur substantial losses, which would spill over into other markets, he said.
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