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By: banshee on Martedì 11 Marzo 2003 11:09
Liquored Up on Leverage: In the damage-du-jour department, credit is due to some worthwhile comments made by William Poole, president of the St. Louis Federal Reserve Bank. (Interested readers can find them at www.stls.frb.org.) Before reprising what I believe is the paragraph that probably got people upset, let me just mention a couple of his statistics: Housing-oriented debt, which comprised only 5% of nonfinancial debt at the end of World War II and about 20% in the early '60s, has grown to 30% today. Of that debt, 40% is issued by Fannie Mae, Freddie Mac or Ginnie Mae. (The latter, as a government-backed institution, obviously has no credit risk, but the same is not true for Fannie and Freddie.) In addition, Fannie and Freddie are far more leveraged than FDIC-insured commercial banks.
With that as a warm-up, here is what Mr. Poole warned: "The issue with Fannie Mae and Freddie Mac is not primarily one of disclosure. Their annual reports disclose quite well the high degree of complexity of their operations, and the small amount of capital they carry above what is required by law [the emphasis is mine] . My questions are these: Given the complexity of their operations, is the capital standard in the law adequate? Why is the standard so far below that required of federally regulated banks? What will happen to the housing market if Fannie and Freddie become unstable?" He goes on to supply this disturbing answer: "Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements, the result could be a crisis in U.S. financial markets that would inflict considerable damage on the housing industry and the U.S. economy."
Lack of Contrition, Public Admonition: So there you are. I would just like to pose what I believe to be the operative question: Why did Mr. Poole choose to make this speech now? Why yell "fire" at a time when the markets are smoldering? Why not express all of those concerns in private? I don't know the answer, but I do have a theory. Perhaps Fannie and Freddie -- which have always been skilled advocates for protecting their turf and their favored status as government-sponsored entities -- wanted no part of Mr. Poole's prudence, so Mr. Poole hoped to effect a change of heart by sounding a very public alarm.
Indeed, his comments today sent shivers down the spines of folks already rattled by Warren Buffett's warning that the derivatives market is a "time bomb." (Presumably, this group does not include Mr. Poole's colleague, the ever-unflappable Easy Al, who still regards derivatives as the best innovation since indoor plumbing.) I believe they were as much a catalyst for pressure in the early part of the day as were our geopolitical problems, our weakness in the currency and the melting foreign markets.
Bill Fleckenstein