Frank, Paulson near deal on oversight of GSEs

The chairman of the House Financial Services Committee, Rep. Barney Frank (D-Mass.), said he is close to striking a deal with Secretary of the Treasury Hank Paulson on beefing up oversight of Fannie Mae and Freddie Mac. Frank plans to introduce legislation by early spring.

The pair have been talking about how to reform the troubled government-sponsored entities (GSEs) since late last year, when it became clear the changeover in Congress would doom a Senate plan to trim the companies’ combined $1.3 trillion portfolios.

Treasury had pushed hard for that legislation over a House-passed bill co-sponsored by Frank that was designed to give the Office of Federal Housing Enterprise Oversight (OFHEO) the discretion to force the companies to shed assets. Now it is inching closer to supporting the more constrained plan.

“We’re still having conversations [with Treasury], but we’re coming close to agreement,” Frank said.

The legislation is still in draft form, and it’s not clear what, if any, changes to the original House bill, which passed in 2005 on a vote of 331 to 90, will be included in the new legislation.

But gaining Treasury’s backing could be crucial to winning over senators who prefer a stronger regulator for fear that the mortgage giants’ huge portfolios pose a threat to the financial system.

Frank insisted OFHEO would be granted “a pretty broad ability” to reduce the portfolios or force the companies to raise their capital levels for reasons of “safety and soundness.”

He said he has spoken about his legislation to members of the Senate Banking Committee, including Sens. Tom Carper (D-Del.), Bob Bennett (R-Utah), Charles Schumer (D-N.Y.), Jack Reed (D-R.I.) and Chris Dodd (D-Conn.), the chairman.

The legislation has yet to attract any Senate backers, perhaps because it remains in draft form.

“Sen. [Richard] Shelby (R-Ala.) believes the passage of a comprehensive GSE reform bill remains necessary,” a spokesman for the Senate Banking Committee, Jonathan Graffeo, said. “Such a bill would create a strong independent regulator with flexible capital authority, a well-defined receivership process and clear-cut guidance on the appropriate components of GSE portfolios.”

OFHEO Director James Lockhart III voiced support for the draft legislation on Friday.

“We’re satisfied that the language there can do what needs to be done in relationship to the portfolio,” he said.

Meanwhile, a Treasury spokeswoman declined to comment on the discussions between Frank and Paulson, but indicated the department has backed off a plan to rein in the mortgage companies by limiting their debt issuance.

“Treasury believes a legislative solution is the best answer to the systemic risk presented by the GSEs,” she said.

Democrats and Republicans have tussled over the mortgage giants for years, with Republicans, including former Federal Reserve Chairman Alan Greenspan, insisting their massive portfolios pose a systemic risk to the financial system.

Frank disputes that notion, arguing that the GSEs aren’t sufficiently leveraged to spread havoc through the markets. He said the term “systemic risk” wouldn’t be used in his legislation and wasn’t the justification for bolstering OFHEO’s powers.

“The regulator should not be able to order a reduction in the portfolios for a general ideological opposition to the GSEs,” he said.

Frank offered praise for Secretary Paulson, whose financial acumen he credited for steering the Treasury away from its tentative plan to scale back the GSEs debt issuance.

“Frankly, the fact that Secretary Paulson comes from Wall Street helps him understand that this is a bad time to roil the markets, particularly in the housing sector,” he said.

In reference to former Treasury secretaries Paul O’Neille and John Snow, who hailed from industry, he added, “Wall Street is better preparation than aluminum or railroads.”