Tottering towers

7 March 2007 By Martin Hutchinson

He s right to call for reform of Fannie Mae and Freddie Mac. But there s no chance of success with their Democratic allies running Congress. Yes, both companies are overleveraged and badly run. But Bernanke s criticism smacks of an attempt to avoid blame after they blow up.

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Federal Reserve Chairman Ben Bernanke said Tuesday that Fannie Mae and Freddie Mac, the two US housing loan governmentsponsored enterprises, should sell most of their $1.4 trillion in assets to focus on supporting homeownership among low income Americans. Only around $420bn of their holdings currently promotes affordable housing.

Fannie Mae restated its earnings from 20012004 by $6.3bn in December 2006, as a result of an audit of its derivatives operations. Its former chairman, Franklin Raines, was forced out of office in 2004. Total Fannie Mae guarantees outstanding at 31st December 2006 were $2.2 trillion; its capital was $42 billion. Negative and interestonly adjustable rate mortgages represented 11% of its business volume in 2006.

Freddie Mac restated earnings in November 2003 that increased earnings for 200002 by $5bn. Freddie Mac had $1.5 trillion of credit guarantees outstanding at 30th September 2006 on capital of $37bn. Freddie Mac announced on 27th February that it would restrict purchases of subprime mortgages from 1st September, 2007.

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