By Steven K. Beckner

CHICAGO (MNI) – One of President Obama’s economic advisors said
Thursday that the administration wants to reform and restructure the
government-sponsored enterprises but does not think it is appropriate to
do so as part of the more general financial regulatory reform making its
way through Congress.

Austan Goolsbee, a member of the President’s Council of Economic
Advisors and chief economist of the President’s Economic Recovery
Advisory Board, suggested it would be risky to try to significantly
change Fannie Mae and Freddie Mac at the present time, given their key
role in supporting the financial market.

Numerous observers have called for GSEs to be restructured as part
of financial regulatory reform, given their central role in the
securitization of often risky mortgage loans prior to the financial
crisis.

St. Louis Federal Reserve Bank President James Bullard, for one,
recently called it “an outrage — an outrage” that GSE reform was not
included in Senate Banking Committee Chairman Christopher Dodd’s
financial reform bill.

Addressing the issue Thursday morning, Fed Chairman Ben Bernanke
also said government sponsored enterprises (like Fannie Mae and Freddie
Mac) need to be reformed.

“Clearly the (pre-crisis) model of Fannie Mae and Freddie Mac is
not a sustainable model,” he said, adding that those quasi-private
firms were “insufficiently capitalized” and had a “conflict between
public and private objectives.”

As he has before, Bernanke suggested two possibilities:

1. “to acknowledge that Fannie Mae and Freddie Mac are government
utilities and make them wholly public … . Make them honest … doing
what their politically determined objectives are.”

2. “to privatize Fannie Mae and Freddie Mac and break them up” and
“allow them to compete in the market for securitization along with
other firms.”

Bernanke indicated he favored the second option and suggested that
the government could still act as “a deep backstop” in case mortgage
markets “break down.” He said privatized GSEs “could pay a premium to
the government and get insurance.”

“What we had before was a wink and a nod,” Bernanke said. “The GSEs
had implicit (government) support but not explicit support, and they
didn’t pay for that support, and their capital was not adequate.”

But when Goolsbee was asked why GSE reform should not be a part of
overall financial regulatory reform, he advocated deferring action.

“We shouldn’t put the brakes on regulatory reform … until we get
GSE reform,” he said.

Goolsbee said President Obama and Treasury Secretary Timothy
Geithner have both “made clear for a long time” that they don’t like the
GSE model of “socializing losses and privatizing profits.”

But how to change that model is “complicated,” he said.

“The reason not to do that instantly is that we’ve gotten up to 90%
of the (mortgage) market currently being backed by the government in one
way or another and if we’re seen to pull the plug on it now we would
have a serious problem.”

Goolsbee said, “We need to resolve Fannie and Freddie and end that
business model,” but added he “would be extremely disappointed” if
financial regulatory reform was delayed until the GSEs are reformed.

Appearing on the panel with Goolsbee, Federal Reserve chief of bank
supervision Patrick Parkinson questioned the wisdom of putting
derivatives into separate bank holding company subsidiaries. “I’m not
sure the experience of the last few years has made that proposition
very well,” he said.

Parkinson also questioned giving the Commodity Futures Trading
Commission supervisory jurisdiction.

** Market News International Chicago Bureau: 708-784-1849 **

[TOPICS: M$U$$$,MGU$$$,MFU$$$,M$$AG$,M$$CR$]