Snow comes down...

...in favor of smaller portfolios and receivership for Fannie and Freddie (Treasury Secretary John Snow, that is).

Several comments on his testimony:

First, for an extended discussion of the importance of receivership powers, see yesterday's post on Alan Greenspan's testimony to the same Senate committee.

Ditto for a discussion of the issue of the housing GSEs' portfolios. (For an interesting piece about a more technical aspect of this trading take a look at this subscription-only article from this morning's Wall Street Journal, which notes that Fannie developed a habit of keeping the best mortgage-backed securities (MBS) for itself when building its portfolio, and only selling less desirable MBSs into the private market.)

Note disbelievingly, however, Snow's claim that the Treasury would only consider bailing out Fannie or Freddie in the context of an orderly receivership process were one of them to fail.

This issue gets to the heart of the much-discussed "implicit subsidy." Legally, Fannie and Freddie each have up to a $2.5 billion credit line at Treasury -- the Treasury Secretary can issue government bonds up to that amount to shore up either of the enterprises if they run into troubles. Now, this amount is a pittance compared to the GSEs' size. But it's important because it could constitute vital "seed money" around which to organize a massive bail-out. It's symbolically important of the government's commitment to the GSEs. Numerically it's not insignificant. And perhaps every Fannie and Freddie creditor is telling himself or herself that, well, certainly I would get a cut of that money.

So on its face, Snow's claim that he would only extend this credit (which lies within the Treasury secretary's discretion) subject to conditions such as receivership sounds like a positive step. Except that politically it's hard to see how it could be true.

Fannie and Freddie are important issues because their debt is so widely held throughout the financial market. After all, it's viewed to be just as secure as real government bonds. Odds are great that your local bank is holding at least some of its assets in the form of GSE debt. So if one of them were to go under, and that debt were to become worthless, it would cause enormous strain throughout the economy, strain that ordinary people would probably start noticing fairly quickly. So there would be tremendous political pressure for the government to do something to fix it. In the face of impending crisis, and with political pressure mounting, what are the odds that any treasury secretary of either party would have the intestinal fortitude to say "Stop!" until Fannie and Freddie started to behave themselves? Here's the bridge link, in case you were wondering.

All in all, Snow is saying the right things. But we should just make sure that we're applauding him for the "right things" that he's actually likely to follow through on.