Why Wall Street Is Critical to GSE Reform

With Fannie Mae and Freddie Mac on the path to being put back into private hands, The Wall Street Journal reports that funding from Wall Street investors will be necessary to lay down the groundwork.

According to WSJ, executives at Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase JPM & Co. and Morgan Stanley have talked with the Treasury Department and Fannie and Freddie’s regulator about how a capital raise could work. However, the question of how much capital that needs to be raised is still a question. THe GSEs may need to raise billions of dollars from investors, and there are currently no indications the government has begun a formal process for hiring banks on a capital raise, though several banks, including Bank of America, Citigroup and Goldman, have begun preparing internally to win a role.

According to Federal Housing Finance Director Mark Calabria at the the Eighth Annual AEI-CRN Housing Conference, regulators have “more than doubled” the GSE’s capital.

“I can’t promise that we can keep that pace up, but we are headed in the right direction.”

Speaking about conservatorship, Calbria stated that he “never thought [he] would see a conservatorship longer than six months.”

“I have a responsibility to fix them and get them out,” he added.

The GSE’s took an important step toward privatization when the U.S. Department of the Treasury  and the FHFA recently announced that they had agreed to modifications to the Preferred Stock Purchase Agreements (PSPAs), permitting Fannie Mae and Freddie Mac to retain additional earnings in excess of the $3 billion capital reserves currently permitted by their PSPAs.

These modifications are an important step toward implementing Treasury’s recommended reforms that will define a limited role for the Federal Government in the housing finance system and protect taxpayers against future bailouts,” said U.S. Treasury Secretary Steven T. Mnuchin.