Treasury Secretary John Snow asked Congress to bring a stronger regulatory arm to bear on mortgage giants Fannie Mae and Freddie Mac. Snow, who addressed the Senate Banking Committee on Thursday, also asked Congress to prevent the mortgage companies from making any new investments.
Snow’s testimony comes on the heels of two major accounting scandals that have hit both of these government-sponsored entities. Only one day before Snow issued these remarks, Federal Reserve Chairman Alan Greenspan asked Congress to cap Fannie and Freddie’s $1.5 trillion portfolio.
In 2004, Fannie Mae was accused of widespread accounting errors and earnings manipulation. The Securities and Exchange Commission (SEC) has demanded that Fannie Mae restate earnings since 2001. As much as $11 billion in earnings could be wiped out after the restatement is completed.
Many people fear that the collapse of Fannie Mae and Freddie Mac could trigger a major financial crisis throughout the economy. It’s not that far-fetched since nearly half of all the mortgage loans in the United States are held or guaranteed by Fannie Mae and Freddie Mac. Both firms have jointly issued more than a trillion dollars in debt, which is held by many of the nation’s largest financial institutions.