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Fannie Mae insolvency possible, official says
By ASSOCIATED PRESS
Published June 27, 2006
The massive portfolios of government-sponsored enterprises such as Fannie Mae and Freddie Mac could become insolvent in a period of "significant interest rate movement," U.S. Assistant Treasury Secretary Emil Henry said Monday. "Unless the portfolios are hedged properly, in a period of significant interest rate movement, there is a risk to the GSEs that their assets and liabilities will ... become broadly mismatched, which can lead to insolvency," Henry said in a speech prepared for delivery to the Housing Policy Council of the Financial Services Roundtable. Henry likened the potential for problems to the savings and loan crisis of the 1980s. To hedge against interest rate movements, the entities must anticipate borrower behavior and deploy risk-management strategies, much like other large companies invested in mortgages, he said. But Henry said the massive size of the portfolios - at more than $1.5-trillion - combined with a lack of traditional market discipline pose a unique systemic risk. "Aggregating each of these attributes under a single entity that also carries with it the broad misperception of a government backstop or guarantee creates a 'perfect storm' scenario," Henry said.
[Last modified June 27, 2006, 01:06:43]
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