White House warns of GSE risks Fannie, Freddie enjoy perception of backing, Mankiw says By Matt Andrejczak, CBS.MarketWatch.com Last update: 4:50 p.m. EST Nov. 6, 2003 WASHINGTON (CBS.MW) - The notion that the U.S. government would bail out Fannie Mae and Freddie Mac if they ran into financial trouble "creates a source of systemic risk for our financial system," a top White House economic adviser warned Thursday. Fannie Mae and Freddie Mac, government-sponsored enterprises created by Congress to help fund home mortgages, enjoy special privileges, such as lines of credit with the Treasury Department. Those special privileges "feed market perceptions that GSE debt has the backing of the U.S. government," said Gregory Mankiw, chairman of the administration's Council of Economic Advisers. "This notion is inaccurate." Read Mankiw's remarks. Fannie Mae spokesman Chuck Greener disagreed with the administration's assertions about the implicit government guarantee. "This is a question that has been asked and answered many times before, and in our view, has been refuted definitively by policymakers and economic experts," he said. Mankiw's remarks to the Conference of State Bank Supervisors come as the administration and lawmakers push to overhaul the regulatory framework for Fannie Mae and Freddie Mac, which earlier this year admitted to understating its profit by $4.5 billion. See full story. Adding to the uneasiness, Fannie Mae on Oct. 29 reported a $1.2 billion accounting error but said the mistake would have no impact on its income statement. Mankiw said that a small misstep in the risk management programs at Fannie Mae and Freddie Mac could have repercussions for other financial institutions. Fannie Mae and Freddie Mac hold a small amount of capital to cushion against unforeseen financial blows, he said. Combined, the sister companies hold $2.2 trillion in debt. Coincidentally, Mankiw's predecessor at the White House, Glenn Hubbard, published a study Thursday that indicated that Fannie Mae's assets are less risky than those of commercial banks. Read his paper. Fannie Mae and Freddie Mac are dominant players in the secondary mortgage securities market. The sister companies buy mortgages from lenders, package them up, and sell to them to investors as mortgage-backed securities with guaranteed yield payments. Due to the enormous size of the mortgage-backed securities market, any problems at Fannie Mae and Freddie Mac would have a ripple effect, Mankiw said. "This risk is a systemic issue also because the debt obligations of the housing GSEs are widely held by other financial institutions," he said. Matt Andrejczak is a reporter for CBS.MarketWatch.com in Washington.