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Over the last several months, Washington has seen unfold a kind of elaborate minuet involving the quasi government agencies Fannie Mae, Freddie Mac, and the so-called home loan banks. Some of Washington’s most powerful policy players are laying down markers for a potential intellectual battle over the future role of the so-called GSEs (government-sponsored enterprise). But because this is an election year, all involved are being deliberately coy about their intentions.

First, senior U.S. Treasury officials, worried about the ferocious ambitions of the GSEs to move beyond their activities in the low-income housing market, questioned outloud the nature of GSE subsidies themselves. This mere mention by the officials dramatically widened interest rate spreads. But then officials quickly and cleverly pulled back, saying their position on this issue reflected “nothing new.” Of course, the reality is that in addition to questions involving potential systemic risk to the U.S. financial system by GSE expansion, Treasury officials have more immediate concerns. With the U.S. Treasury securities market shrinking as the U.S. rapidly pays down debt, Treasury officials must confront the question of establishing some benchmark for dollar-based reserves in the future.

Notice the second player involved. Powerful Senate Banking Committee Chairman Phil Gramm (R-TX) is being just as shrewdly coy on such a sensitive issue. Gramm’s position is that his committee “may” hold hearings this year on the role of Fannie Mae and Freddie Mac. But he quickly makes clear that no decision has been made. “So it’s unlikely then that you will hold hearings?” the Senator was recently asked, to which he quickly responded, “I didn’t say that. It is possible we will hold hearings.”

What is happening here is that Fannie Mae and Freddie Mac enjoy perhaps the most powerful lobbying muscle in Washington. Plus they have an effective grass roots network. Their instititutions are not easily defeated, particularly on efforts to limit their current lending activities. Be that as it may, in late 1998, Freddie Mac attempted to slip language into banking reform legislation that would have allowed its entry into the mortgage insurance business. To the surprise of many, that effort failed. That is why the jury is still out on the issue of expanded powers. As a former Treasury official said, “This situation is not unlike the S&Ls in the early 1980s which enjoyed enormous political clout on Capitol Hill. History will not be friendly to those officials back then who failed to rein in the institutional powers of the S&Ls and let a ticking time-bomb grow for a decade.”

This Financial Services article was written by International Economy, The, on 6/1/2005

Syndicated at http://www.findarticles.com/p/articles/mi_m2633/is_3_14/ai_62548769