Officials clash over Fannie, Freddie

Richmond Federal Reserve Bank President Jeffrey Lacker called for "demonstrably" privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration's strategy of keeping them as federally backed firms.

"I would prefer to see them credibly and demonstrably privatized," Lacker said Tuesday in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan's view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off.

Treasury Secretary Henry Paulson by contrast has tried to keep Fannie Mae and Freddie Mac in their current form as government-sponsored companies owned by shareholders. Lacker's remarks come as a slide in the firms' stocks and increase in their borrowing costs spur speculation the Treasury will intervene.

Lacker said financial-market turmoil shouldn't keep the Fed from raising interest rates to bring down inflation, becoming at least the fourth Fed official to make that point in the past five weeks.

"It is important to withdraw this monetary-policy stimulus in a timely way," Lacker said. "That may require us to withdraw before we are certain all of the weakness is behind us and before we are completely certain that financial markets are as tranquil as we would like to see."

Federal funds futures traders expect no change in interest rates through year's end. The Fed has reduced its main rate 3.25 percentage points over the past 11 months to 2 percent.

"I certainly don't think the federal funds rate should be any lower given where we are," said Lacker. "Monetary policy is very stimulative."

Lacker also said he would be surprised to see a large U.S. bank fail. "I am broadly confident in the ability for commercial banks to weather the storm," he said. Still, there is "substantial uncertainty" around the losses and writedowns that will result from mortgages originated in 2006 and 2007, which could cause "other shoes to drop," he added.

Lacker's comments on Fannie Mae and Freddie Mac echoed the views by some former Fed officials, led by Greenspan, that the companies' links with the federal government ought to be severed. The firms package mortgages into bonds for sale to investors. They traditionally borrowed more cheaply than private companies because of an implicit government backing.

"It was an unusually straightforward answer for a Fed official," David M. Jones, president of DMJ Advisors LLC in Denver and author of four books on the central bank, said. "There's still a debate over this issue" of addressing Fannie Mae and Freddie Mac, he said.

Paulson last month won the authority to inject capital into Fannie Mae and Freddie Mac, in legislation aimed at restoring confidence in the firms. Stocks and bonds issued by the two have since declined amid continued concern they lack sufficient capital.

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