Chrystia Freeland, Financial Times US managing editor, interviewed Dick Syron of Freddie Mac, in this segment discussing the portfolio cap, jumbo mortgages and government regulation. This is a transcript of the interview, which you may watch here.
Financial Times: Thank you for joining us, Mr. Syron.
Richard Syron: Thank you very much for having me.
FT: Was last week’s increase in your portfolio cap enough?
RS: Well, last week’s increase in our portfolio cap actually is not much of an increase at all. In fact, if you look at it over time it’s probably less than half of 1 per cent.
FT: So, you haven’t really felt it’s had an impact?
RS: I don’t think it’s had a significant impact on us, no.
FT: Do you support Senator Schumer’s proposal to raise it more significantly?
RS: Yes, I would support the proposal to raise it more significantly. I think it is important, though, that we put in context that there is no panacea for this whole thing. I think Freddie and Fannie should do more. Actually, we will buy this year about $30bn in sub-prime mortgages.
FT: And why do you think there seems to have been a political reluctance to increase your cap?
RS: I think, to be quite candid about it, these organisations were not without fault in the past. Someone said that maybe we can be the knights in shining armor now. I think our armor’s got a little tarnish on it. I think at some points in the past we were...
FT: Concerns about accounting, concerns about how well run...
RS: Concerns about accounting, concerns about, honestly, our arrogance and I think our hubris to some extent. I’d like to think that goes back beyond three and a half years, of course, which is my time, but I think that we have had, and probably deserved, our comeuppance but, gee, we’re very far along in fixing ourselves in the accounting issues.
FT: And what about the whole area of jumbo mortgages? Do you think the ceiling should be raised?
RS: Yes, I think the ceiling should be raised but, actually, I think this is a very interesting situation. I think raising the ceiling would have the effect that once people knew that we were there... Because that’s a lot of what we do, is we provide a takeout bid to provide mortgages that someone’s already originated. The spread now is probably about 90 points over conforming mortgages; it’s traditionally more like 30. I think within a week after the time the spread was lifted, because the markets would know, and what these markets want is to be rid of uncertainty. Once the markets knew that, I think you’d find spreads coming back very close to the historical level.
FT: And that would be if the ceiling was lifted entirely or raised to a higher level?
RS: No. First of all, to be clear on this, I don’t disagree with the ceiling per se but, again, I think we want to avoid being too theocratic about this. I would raise the ceiling on a temporary basis and I’d raise it somewhere in the neighborhood of $650,000 and then have it come back.
FT: For how long? Would you have a sunset clause?
RS: Yes. But I think you probably need to do it for two years, given people’s concerns for the market. People have talked about a year but I think you’d probably do it for two years, given people’s concerns, so they’d know that they had this back-up bid, if you will, for that period of time.
FT: Do you think that’s going to happen?
RS: My guess is it will.
RS: Well, two things. One, when I was a practising economist, I had a hard enough time forecasting the economy, forecasting politics is infinitely more difficult. I would only say, and echo what Mr. Bernanke said, if it’s going to happen, and I think it should happen, it should happen quickly.
FT: And does the same apply to raising your cap?
RS: Well, I think if you’re in a distress situation, which we are, and uncertainty begets uncertainty and distress, unfortunately, in this situation, begets distress, that anything you’re going to do, the sooner you do it, the better.
FT: In view of the credit crunch, have you been thinking about reviewing your own underwriting standards?
RS: Well, we have actually had very good credit experience over time. We traditionally have not bought the sub-prime loans. As I mentioned to you, we’ll do about 30 this year, given the distress in the market.
FT: So, these will be tighter standards than the ones that prevailed previously in the market.
RS: They certainly will be tighter standards than some of the most egregious and they were pretty egregious cases that occurred in the last several years.
FT: And do you think those egregious standards are a big cause of our current problems?
RS: Well, I think our current problem is caused by really three things. One is that for the first time in the history of mankind we have the world’s largest emerging economy being a net exporter of both capital and labour.
FT: So, this is all about China?
RS: Well, that’s what I’m talking about in this case. I think China is a major factor in this, not in a pejorative sense but just the fact that they’ve been on the world economy. The second thing is the advances in technology have deinstitutionalised, if you will, the mortgage market and made it much, much more spread around and diversified. The third thing is the old tension between fear and greed went out for a while and that’s why I think to fix this over the longer run, you have to fix the mortgage brokerage business and the origination business because I am convinced that it’s a little bit like what happens with drugs and everything else; if you originate it, as the saying goes, they’ll come.
FT: Any one who’s particularly to blame, whose standards were particularly lax?
RS: Well, I wouldn’t say it’s any one. I am a very, very strong proponent to having some sort of national registration system instead of standards for mortgage brokers to ensure that... There are standards that apply to lots of things in life. Right? If you’re going to be seeing people and advising in many cases on what kind of mortgage they take out, I think you should have more standards, candidly, apply than have been the case in the past.
FT: So, we need more government regulation.
RS: I’m going to give you something I shouldn’t do. Yes. A straight answer in that case.
FT: And what about financial engineering? Aren’t credit derivatives also partly to blame for the crisis?
RS: Credit derivatives are part of the change in the whole financial environment and probably without them you couldn’t have had the distribution of this product as widely as it did. But I would argue over the span of time that credit derivatives, interest rate derivatives and all these things really have improved the efficiency of markets. You raise a very good point. What we’ve done is we’ve improved kind of the speed of markets and the fluidity of markets in a way without, at the same time, improving the ability of borrowers to understand the implications of a lot of that to them.
FT: Thank you very much.
RS: Thank you very much for having me.
FT: And now Dick Syron places his bets on long short. Okay, Mr. Syron, now we’re going to play long short. Are you ready?
RS: Ring the buzzer.
FT: US dollar?
RS: At this stage I think long.
FT: Mervyn King?
RSP: Tough. I would say market-perform.
FT: London Stock Exchange?
FT: Manhattan real estate?
FT: Alan Greenspan’s book?
FT: The Red Sox?
FT: John Thain?
RS: I think John Thain’s long.
FT: US inflation?
RS: Short. Which way are we going to mean is concern?
FT: Short is if it goes down.
FT: The yen?
FT: Thank you very much.
RS You’re welcome.
FT: That was Dick Syron of Freddie Mac on the portfolio cap, jumbo mortgages and government regulation. You can also hear him discussing house prices, the US economy and Alan Greenspan. Next week Peter Chernin of News Corp reviews the news on video for FT.com’s View from the Top.