Yes, I know full versions of this are available, but these were my shorthand notes as I listened with my court-reporter stenograph.

forgive typing errors please.

- Fannie and Freddie are the only ways to securitize mortgages

- Private Label Securitization has stopped

- "task now" to establish link between wall st and main st that addresses previous GSE problems

- Financial crisis enters it's 2nd year. It's cause was the housing boom

- But the boom in mtg. lending was part of a broader boom with excessive credit, risk, and opacity across the markets

- still, mortgage markets have been deeply affected, thus market has shut down to folks with bad credit

- gov. agencies stepped in to fill the gap (as best they could)

- ability for them to continue is based on CONFIDENCE

- signs emerged mid summer that investors were losing confidence in GSE's

- erosion of confidence damaged the financial system

- Then came congressional bill for FHFA and conservatorship

- Fed worked closely with FHFA to assess financial positions of GSE's

- observations of fed supported view of FHFA that GSE's were unsafe.

- At same time, treasury committed to significant capital support for GSE's. Federal reserve endorsed as consistent with goal of maintaining financial stability

- intial response was good as spreads tightened and credit loosened

- however, more recently, those markets have come under some stress due to general dislocations in capital markets

- congress should reconsider the roles of gse's in market: namely mitigating systemic risk.

- we must consider the roles of gov and GSE's in the process of securitization.

- securitization good because it increases funding sources AND reduces investors risk by spreading it out.

- effective sec. model not easy. many schemes were tried and abandoned many times in the past.

- 3 principles ; investors must believe in credit quality - origination process is managed

- 2nd because pools have highly correlated risks, institutions must have capacity to manage risks carefully

- 3rd because they're complex, transparency is essential

- during early phases, those three principles were adhered to.

- but with housing and credit boom, everyone got lax and became complacent, securities became complex, and not enough was paid to risk that housing markets might take a turn.

- early 06, signs began to emerge that something had gone wrong.

- perhaps recent mortgage cycle will be remembered like other crises

- but a difference is that GSE's continued to securitize while all else was in turmoil. Investors continued to participate with GSE's because of implicit gov backing.

- this suggests gov. support is good, but can take many forms.

- existing GSE model creates inherent conflict between shareholders and bondholders

- during past 15 years, they've operated with leverage. LACK OF CAPITAL proved their downfall.

- in shareholders interest to maximize value of portfolios and leverage

- however fed has argued large portfolios create risks

- fed's plans now and in the past : strong regulator to establish criteria to ensure policies are consistent with the mission

- Fed does not like the size of portfolios.

How might we do this in the future?

- Privatize?

- some proposals call for breaking up into smaller units and it would solve some problems, : diminish systemic risks and conflict of interest. could also be more free from gov. interest. But fed questions their viability without implicit or explicit gov backing. How could they fare in the future under stressed conditions? So it seems some form of gov. support is required.

- one option is to create a gov. bond insurer, which would provide insurance for any bond used for the mortgage securitization process.

- this would limit gov's exposure while getting most of the necessary benefits.

-------

- GSE's not essential. Not every country has them

- some countries use covered bonds.

- issuance of covered bonds in Europe has also been affected by turmoil. but they've still been able to find buyers.

- covered bond spreads widened LESS than GSE type securities during the turmoil

- in a nutshell, GSE's made it difficult, plus the US doesn't have the statutory framework to protect covered bond investors. plus much greater capital requirements.

- covered pool assets typically actively managed

- overall this approach is attractive, but given features of the us system, they may not be viable here.

-0--------------

3rd approach is to tie GSE's even more closely to the gov, in which we'd have to consider the extent of public participation. They would retain shareholders and be overseen by a public board. Public utility oversight has drawbacks.

- bit it might allow a reasonable mix of benefits versus drawbacks.

- private shareholders may be able to resist political influence

------------------

others:

- quasi public organization

- cooperative ownership structures where originators stay on the hook to greater extent.

----------------

regardless we gotta do sumpin' !!!!!!

- once gov. guarantees are involved, the systemic risks must be dealt with

-----------------------------