The Mortgage Gorillas

While I’m not a big Greenspan fan, he is exactly right to draw attention to the two gorillas hiding in the closet of nightmares for the US economy:

WASHINGTON (Reuters) – Federal Reserve Chairman Alan Greenspan on Wednesday told Congress to curb the rapid growth of Fannie Mae and Freddie Mac to cut the risks the mortgage giants pose to the financial system, just as a U.S. regulator unveiled new accounting problems at Fannie.

…”World-class regulation, by itself, may not be sufficient and, indeed, might even worsen the potential for systemic risk if market participants inferred from such regulation that the government would be more likely to back GSE debt in the event of financial stress,” Greenspan said.

But he proposed a solution. “We at the Federal Reserve believe this dilemma would be resolved by placing limits on the GSEs’ portfolios of assets, perhaps as a share of single-family home mortgages outstanding or some other variation of such a ratio,” the Fed chief said.

On the other side of Capitol Hill, Armando Falcon, director of Fannie’s and Freddie’s regulator, outlined a fresh series of accounting missteps at Fannie Mae, where problems identified so may lead to a profit restatement of as much as $11 billion.

If and when a crisis of confidence hits the US financial markets, I will not be at all surprised if these two beasts are to blame for the initial shock.

Kash