If government, and government-sponsored enterprises like Fannie and Freddie, don’t increase their risk-taking, we might be in for a really horrific financial crash. The key, though, is making this increased risk-taking temporary. That is, rolling it back when credit markets start functioning on their own again.
What Justin forgets is that it’s the decreased risk-taking that was meant to be temporary; today’s announcement simply marks the beginning of the end of OFHEO punishing Fannie and Freddie. They got up to accounting shenanigans; in response, OFHEO increased their capital requirements. Now it’s bringing those requirements back down.
Check out OFHEO director James Lockhart’s statement:
Effective immediately, OFHEO is reducing the OFHEO-directed capital requirement for Fannie
Mae and Freddie Mac from 30 percent to 20 percent above the 2.5 percent minimum statutory
Both companies have made substantial strides toward the completion of their remediation
processes, and fulfillment of their Consent Orders, which we expect to lift in the near term.
Three weeks ago their audited financial statements for 2007 were released on time.
And the press release:
OFHEO announced that Fannie Mae is in full compliance with its Consent Order and that Freddie Mac has one remaining requirement relating to the separation of the Chairman and CEO positions. OFHEO expects to lift these Consent Orders in the near term. In view of this progress, the public purpose of the two companies, and ongoing market conditions, OFHEO concludes that it is appropriate to reduce immediately the existing 30 percent OFHEO-directed capital requirement to a 20 percent level, and will consider further reductions in the future.
What does this all mean in English? Basically, according to law, Fannie and Freddie have to have a capital base of 2.5% of their assets. But they did such a bad job running themselves that their regulator bumped that up by 30%, to 3.25%, and told them to clean their acts up.
Now, acts (mostly) cleaned up, OFHEO is bringing the capital requirement down to 20% above the minimum, or 3%. And it’s said that it will probably allow it to fall further towards the 2.5% level in future.
So what we’re about to see is, in one sense, increased risk-taking from Fannie and Freddie. But really it’s just OFHEO de-hobbling them.
Should Fannie and Freddie ever operate on a capital base of just 2.5%? That corresponds to an enormous degree of leverage: 40x, bigger than Carlyle Capital or Bear Stearns. But it’s the number in the statute books. If you want to change it, fine. But now’s maybe not the best time to start doing that.