Federal regulators tried to assure the financial markets yesterday that mortgage lenders Fannie Mae and Freddie Mac "are adequately capitalized," while lawmakers said there is a growing consensus that the Federal Reserve Board should be granted more regulatory authority over broker-dealers.
Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the House Financial Services Committee about the state of U.S. market regulation and how a replay of the Bear Stearns collapse and mortgage crisis could be prevented in the future.
The two regulators gave their testimony as market angst pushed down stock and debt prices for the government-sponsored enterprises in the past two days. Investors fear that the companies do not have enough cash available to stay solvent.
"Fannie Mae and Freddie Mac are working through this challenging period," Paulson said in his statement. "They play an important role in our housing markets today and need to continue to play an important role in the future."
Bernanke and Paulson said they could not speculate about the particular risk to the mortgage lenders or any institution. But Paulson said the lenders' regulator, the Office of Federal Housing Enterprise Oversight, has made clear that the two GSEs are adequately capitalized.
After the testimony, Ofheo's director issued a statement saying both GSEs have "access to debt markets and over $1.5 trillion in unpledged assets." The two have raised more than $20 billion in capital.
Lawmakers debated the regulatory proposals recommended by the Fed and Treasury that would give the Fed authority to regulate a wide range of market sectors, from mortgage lending to credit derivatives. The Fed currently has authority to regulate commercial banks by ensuring they properly are capitalized. But during the Bear Stearns crisis, the Fed opened its lending window to investment banks and other institutions as credit on the open market proved difficult to secure. The Fed continues to loan to broker-dealers who agree to submit to oversight.
Bernanke urged Congress to approve legislation that would make the Fed responsible for overseeing investment firms' liquidity holdings, capital, and risk management - areas that historically have been the purview of the Securities and Exchange Commission. This would prevent firms from getting overly leveraged, he said.
In light of the Bear Stearns collapse, Bernanke said Congress should consider providing "new tools" for ensuring an orderly liquidation of a securities firm in danger of bankruptcy. He also said Congress should consider granting the Fed explicit oversight for payment and settlement systems in the credit derivative markets.
The regulatory proposals are receiving bipartisan support among the lawmakers. Committee chairman Barney Frank, D-Mass., said before the credit crunch markets wanted "a softer touch" from regulators.
"Things have changed," Frank said. "The serious economic troubles we have seen are because of an inadequacy of regulation."
Lawmakers admitted that legislation will likely not pass until the next congressional term in 2009, though the regulators expressed an "urgent need" for action.
Consolidating regulatory control from the Treasury and SEC under the Fed would prevent holes is regulation, John Lonski, chief economist with Moody's Investors Service, said in a brief interview.
"They want to clarify who's responsible for what so there aren't any regulatory dead zones," he said. "You get the impression that one agency or the other may have been lax in its oversight of the mortgage situation in part because they assumed it's really the responsibility of the other guy."