Magazine article American Banker

Is GSE Report A Setback for Reformers?

Magazine article American Banker

Is GSE Report A Setback for Reformers?

Article excerpt

WASHINGTON -- The government-sponsored enterprises turned a political corner Thursday as a key investigation of Fannie Mae turned up no new problems -- robbing critics of ammunition needed to move reform legislation.

Reform proponents, by insisting on ever-tougher limits on GSE operations, may have missed the chance to get something enacted.

"This report reinforces our view that the worst of the GSE scandals is past," Jaret Seiberg, a policy analyst with Stanford Washington Research Group, wrote in a client report. "Each day that passes takes us another day away from the scandal. That makes it increasingly tough for GSE critics to achieve their goal of restricting the retained mortgage portfolios."

The report, released Thursday, did criticize Fannie's accounting procedures, culture, and former management, but it did not make additional allegations. The GSEs have been under siege since 2003, when Freddie Mac announced that accounting errors would force it to restate three years of earnings.

Bush administration officials, pointing to the report's conclusion that Fannie had an unhealthy emphasis on earnings, insisted it adds impetus to a bill.

The report confirms "this link that we have been trying to stress, which is that you have portfolios that are a) creating systemic risk and b) are unrelated to the mission of the enterprises," Randal Quarles, the Treasury Department undersecretary for domestic finance, said at a press conference.

"Now you have an independent review by a very respected lawyer and his colleagues that exposes what the culture was at the time the portfolio was being created. ... It was a culture focused on increasing earnings growth ... by any means possible," he said.

Fannie hired former Sen. Warren Rudman to lead the investigation, and after 17 months, he delivered a 2,652-page report.

The administration has demanded any reform bill limit the GSEs' portfolios.

Senate Banking Committee Chairman Richard Shelby, the author of a bill that includes strict portfolio limits, agreed with that demand.

"Many of these issues arose because of the large retained portfolio held by Fannie Mae," he said in a press release. "While a portfolio of this size is not a critical component in achieving their housing mission, it did serve as a mechanism to allow Fannie Mae to ensure earnings growth."

But most observers said the report will allow Fannie -- substantially weakened after it announced in December 2004 that it had to restate $11 billion of earnings for 2001 through 2003 -- to rebuild its influence.

The report "strengthens the political hand" of both Fannie and Freddie and "seems to go out of the way to clear current management," said Brian Gardner, a vice president at Keefe, Bruyette & Woods Inc.

He also said the report "bolsters the political standing" of Dan Mudd, who became Fannie's chief executive officer last year and is credited in the report with rehabilitating the GSE. …

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