Everyone knows that the bright people who created the Federal Reserve System carved up the nation into 12 asymmetrical regional slices, into which a dozen Federal Reserve Banks were placed. Also, the architects of the Federal Home Loan Bank network designed a national puzzle consisting of 12 regional institutions.
However, the government-sponsored enterprises (GSEs) are not regional – Fannie and Freddie are national entities with a national mandate, and they are anchored firmly within the seat of the federal government.
To date, we have no clue what is going to happen to Fannie and Freddie. After a year, they are still ailing in a state of conservatorship.
Clearly, it is not practical to allow the GSEs to resume their previous operations – particularly in regard to locating them within a cab ride of the Capitol, where elected officials in constant need of campaign donations would be waiting with their wallets open. One major reason why the GSEs got themselves into so much trouble was because of their ability to game the Washington system.
I was thinking that a post-conservator era should have a new look for the GSE schematics. In my view, instead of having two GSEs serving the nation, why not follow the example of the Federal Reserve System and the Federal Home Loan Banks by having a number of regional GSEs spread out across the country?
For starters, I don't think we need 12 GSEs – a new system could work with four regional GSEs – one for each corner of country. None of these new entities would have Washington offices – their mission would be strictly regional, and the Federal Housing Finance Agency would serve as their de facto representative before Congress.
Subdividing the two national GSEs into four regional versions would better serve the distinctive housing markets. Let's face it: There is no national housing market – each region has different concerns, challenges and opportunities, so having a GSE that is specifically in touch with its region should – in theory, at least – create a better understanding of what the particular markets require.
Spreading out the GSEs would also prevent a reprise of having a single entity collapsing – or, in this case, a pair of giant agencies simultaneously falling down. Take the example of the Federal Home Loan Banks. While some of the individual banks have experienced significant problems during the current crisis – most notably the Seattle bank – the system on the whole is sound and not in need of major cash transfusions.
In a recent interview with Secondary Marketing Executive, Alex J. Pollock, resident fellow at the American Enterprise Institute in Washington, D.C., noted that the system's setup enabled particular banks to handle the problems centered within their region.
‘The [bank in] San Francisco came out of IndyMac with every cent and charging them a pre-payment fee – and IndyMac was a big stress test,’ says Pollock.
Now, imagine what would have happened if there had been a single Federal Home Loan Bank located in Washington. The IndyMac implosion, coupled with the skein of bank failures and near failures over the past year, would have crippled the system. We are seeing a similar situation with the Federal Deposit Insurance Corp., which is aching from this year's steady stream of failed banks (now at 100, with possibly more to come).
But with the Federal Home Loan Banks, the pain was spread out across the country, with each regional bank handling the problematic institutions closest to its offices. Yes, some banks within the system came out somewhat worst for the wear, but the system, as a whole, is intact and still functioning.
I don't know if the powers-that-be in Washington have considered this option, but I hope someone puts it on the table. If anything, it couldn't possibly be worse than the setup that came before it.
– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]
[i] (Please address all comments regarding this opinion column to hallp@sme-online.com.)[/i]
