Fannie and Freddie at risk, Treasury says http://seattletimes.nwsource.com/html/businesstechnology/2003087811_fannie27.html Fannie and Freddie at risk, Treasury says Dow Jones Newswire via The Associated Press WASHINGTON â The massive portfolios of government-sponsored enterprises (GSEs) 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 GSE problems to the savings-and-loan crisis of the 1980s. To hedge against interest-rate movements, the GSEs 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 GSE portfolios â at more than $1.5 trillion â combined with a lack of traditional market discipline and a level of interconnectivity in the financial markets means the GSEs 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. Henry noted that the markets continue to hold the "false belief" that the U.S. government guarantees GSE debt, which has led to preferential funding rates and the expansion of GSE portfolios. "Simply stated, our financial markets would be safer if these assets and associated risks were broadly redistributed," Henry said. Henry noted that the GSEs say they are hedging against risks from an unexpected or sharp change in interest rates. In response, Henry pointed to a recent report from the Office of Federal Housing Enterprise Oversight that criticized GSE hedging practices. If GSE hedging models failed to anticipate an interest-rate shock, "the results would be without precedent," he said. Commercial banks and other creditors would experience direct losses as GSE debt obligations lost value, or there was a real or perceived inability of a GSE to meet its debt or mortgage-backed security obligations.