Does Alan Greenspan Love Banks or What?

When contemplating GSE reform, here's an interesting question to ponder: If Fannie Mae and Freddie Mac pose a systemic risk to the U.S. financial system because they own $1.4 trillion in mortgage assets, then how come the nation's top five banks - which hold trillions of dollars in derivatives - do not?

Federal Reserve chairman Alan Greenspan wants Congress to cap Fannie and Freddie's mortgage holdings at $100 billion each for a total of $200 billion.

If Mr. Greenspan gets his way, that means the two GSEs would have to unload, over time, about $1.2 trillion in MBS and whole loans. At $1.4 trillion (on-balance sheet), Fannie and Freddie account for just 15.6% of all outstanding home loans in the U.S.

But according to Sen. Paul Sarbanes, D-Md., the ranking minority member on the Senate Banking Committee, some 95% of all notional derivatives are concentrated at the nation's top five banks. How much in derivative contracts do banks hold? About $55 trillion - with a "T."

During congressional hearings, Sen. Sarbanes noted that federal banking regulators do not have the authority to limit the growth of commercial banks, suggesting that if Fannie and Freddie should have asset limits then maybe so, too, should banks.

One investment banker we spoke with - a Republican who has an open mind about the GSEs - believes that if FanFred's holdings were capped at $200 billion, banks would be the obvious buyers of their discarded MBS and would control not just the mortgage industry (which they sort of control now) but could, in effect, control liquidity in the housing finance market.

I might add, as an aside, that if you can control liquidity - and bond prices - then you can control interest rates. You might think "the market" determines rates. That's correct - but thanks to the death of Glass-Steagall, who is the market? Answer: banks.