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Mix-Ansicht- Grosses Aua - XERXES, 23.04.2002, 10:29
Grosses Aua
Greenspan Says Subsidies to Fannie, Freddie Pose Risk (Update1)
By John Cranford and Michael McKee
New York, April 22 (Bloomberg) -- Implicit subsidies to so- called government-sponsored enterprises, such as Fannie Mae and Freddie Mac, increase the risks to the world's financial system, Federal Reserve Chairman Alan Greenspan said.
Without referring to the top two buyers of U.S. home mortgages by name, Greenspan said these enterprises benefit from ``the perception of government support.'' That, in turn, may induce investors to take less care than they typically would in assessing the riskiness of their securities.
``We need to be careful not to allow subsidies to unduly disturb an efficient financial structure that has so clearly contributed to increased economic stability,'' Greenspan told the Institute of International Finance in New York over a satellite hookup from Washington.
In a speech devoted mostly to the benefits and potential risks of derivatives, Greenspan said the flexibility they provide to the financial system is one reason the recession that began in March 2001 may have been shorter and less severe than in past slowdowns.
``If the indications that the contraction phase of this business cycle has drawn to a close are ultimately confirmed, we will have experienced a significantly milder downturn than the long history of business cycles would have led us to expect,'' Greenspan said, echoing his testimony to Congress last week.
In answer to an audience question, he repeated that ``it's doubtful the recovery is going to be rapid.'' Still, there are ``early signs of recovery in capital investment,'' he said. As he has previously, Greenspan said it will be necessary for businesses to step up their spending for the rebound to take hold.
`Imbalances Didn't Fester'
``Remarkably, the imbalances that triggered the downturn and that could have prolonged this difficult period did not fester,'' Greenspan said in his speech.
For that, he credited ``the combination of deregulation and innovation in the financial sector.'' He singled out derivatives, which include options, interest rate swaps and other financial instruments whose values are determined by other securities or benchmarks.
These innovations have helped create a ``far more flexible and efficient financial system,'' Greenspan said.
``New financial products have enabled risk to be dispersed more effectively to those willing, and presumably able, to bear it,'' he said. ``Shocks to the overall economic system are accordingly less likely to create cascading credit failure.''
By allowing risks to be shared, derivatives ``appear to have effectively spread losses from recent defaults'' by Enron Corp., Global Crossing Ltd, Railtrack Group Plc and Swissair Group, he said.
New Risks
That doesn't mean risks have been eliminated, he said. ``The very technologies that appear to be the main cause of our apparent increased flexibility and resilience may also be imparting different forms of vulnerability that could intensify or be intensified by a business cycle,'' Greenspan said.
The biggest check against excessive risk comes from the ``counterparties'' to derivatives trading, ``whose due diligence is fundamental to the containment of risk,'' he said.
The complexity of derivative investments ``could leave counterparties vulnerable to significant risk that they do not currently recognize, and hence these instruments potentially expose the overall system if mistakes are large,'' Greenspan said.
That threat in exacerbated in the case of government- sponsored enterprises, he said. ``The perception of government support may induce the counterparties of GSEs to apply less vigorously some of the risk controls that they apply to manage their over-the-counter derivatives exposure,'' Greenspan said.
Something to Discuss
Greenspan's remarks on subsidies weren't new, economists at the speech said. ``These are remarks he's essentially made before,'' said John Lipsky, chief economist at J.P. Morgan Securities Inc. in New York, who was in the audience.
``He didn't give us his conclusions,'' Lipsky said. ``But the fact that he brought it up means he wants it to be discussed.''
Greenspan has criticized implicit subsidies to Fannie Mae and Freddie Mac on other occasions. In an August 2000 letter to Republican Representative Richard Baker of Louisiana, he said government benefits for the two lenders distort the mortgage market.
``If the subsidy enables Fannie and Freddie to hold less capital, then bondholders and taxpayers may be at a greater risk if these government-sponsored enterprises need financial assistance in the future,'' Greenspan's said in the letter.
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