Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are huge in size, huge in global systemic risk, close to zero in capital and hence should get SIFI status, believes Alex J. Pollock of American Banker.
According to Alex J. Pollock, considering their massive asset size and extreme leverage, the two GSEs should be designated as SIFI by the Financial Stability Oversight Council (FSOC)
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SIFI tag from FSOC
The FSOC has powers under Dodd-Frank financial reform legislation to place institutions under enhanced oversight. A company getting the SIFI tag would be required to conform to various requirements including risk-based capital, leverage liquidity, stress-testing, overall risk management, resolution plans, as well as early remediation and credit concentration.
American International Group Inc (NYSE:AIG) and Prudential Financial Inc (NYSE:PRU) have already been designated SIFIs and Metlife Inc is currently in the third stage of the process and expected to be designated a SIFI as well.
GSEs are extremely leveraged
Considering Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s total assets are bigger than JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC) and Fannie and Freddie are each bigger than Citigroup Inc. (NYSE:C), Wells Fargo & Company (NYSE:WFC), Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS), Prudential Financial Inc (NYSE:PRU) and American International Group Inc (NYSE:AIG), Alex J. Pollock writes if anybody at all is a SIFI, then the two GSEs are SIFIs.
Moreover, with $3.3 trillion in assets, Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) would make it the No. 1 SIFI of all, while Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) would rank at No. 4 with $2 trillion in assets.
The two GSEs are also extremely leveraged with Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) leveraged at 341.1 and a leverage capital ratio of a risible 0.29%, while Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) has leverage ratio of 153:1 and a leverage capital of an almost as risible 0.65%.
Recently, PIMCO’s CEO Douglas Hodge highlighted the huge size of the two GSEs. He pointed out that today 99% of all Mortgage Backed Securities are backed by these two GSEs and if President Obama plans to wind down the GSEs, there will be a problem as there will not be much appetite from institutions like PIMCO for MBS not backed by the two GSEs.
Alex J. Pollock points out over $5 trillion of the obligations of these hyper-leveraged institutions are widely held throughout the U.S. financial system and around the world by banks, central banks, other official bodies and many other investors. He is surprised at FSB not designating the two GSEs as G-SIFIs.