Geithner Blasts Fannie and Freddie's 'Short-Term' Strategies That Led to Crisis

Treasury chief says administration supports reforming lending giants

More On Legal & Compliance

from The Advisor's Professional Library
  • Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients’ privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
  • Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients’ financial well-being may be jeopardized.  RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.   
Tough words from Treasury Secretary Timothy Geithner. In prepared remarks on Tuesday, August 17, Geithner accused Fannie Mae and Freddie Mac of reckless strategies enacted to "maximize short-term returns to shareholders and senior management." A "toxic combination" of perceived governmental guarantees and lack of oversight made these strategies possible, and while they didn't cause the financial crisis on their own, Geithner admitted, they made it worse.

The Geithner's remakes were made at the Conference on the Future of Housing Finance in Washington.

There is no "clear consensus" on how to design a new system, Geithner said, but he declared the Administration would side with whoever argued for reform.

"We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support. We will not support a return to the system where private gains are subsidized by taxpayer losses."

Geithner asked whether it was the responsibility of the government or private markets to provide insurance against losses. Without support, he said, the financial system would be unable to support mortgage lending in future recessions.

"The challenge," he said, "is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure."

Finally, Geithner asked how the transition to a new housing finance system should be managed. He said it was imperative to begin "weaning the markets away from government programs" and to include the private market in the mortgage business. Furthermore, it is important to keep overall mortgage rates low, and to ensure consumers have access to credit at "attractive rates," he said.

While he declared the Administration would "side with those who want fundamental change," Geithner argued for bi-partisanship.

"The failures that produced the system we have today were bi-partisan. The solution must be as well," he said. "We must take this opportunity to build a more stable housing finance system that that better protects American taxpayers."

Reprints Discuss this story
This is where the comments go.