London's Financial Times Interviews CEO Syron

In a video interview with the Financial Times released on September 28, 2007, Richard F. Syron discusses the causes of the credit crisis, the role Freddie Mac could play in a mortgage market recovery and the prospects for the U.S. economy.

The video and transcript of the interview are available at the Financial Times website.

Excerpts from the interview are given below.

Was last week's increase in your portfolio cap enough?

Last week's increase in our portfolio cap actually was not much of an increase at all. In fact, if you look at it over time, it's probably less than half of 1 per cent . . . I would support [Senator Chuck Schumer's] proposal to raise it more significantly. [The turmoil in the US mortgage market] is unfortunately a big problem, not just domestically, but internationally, and I think there are no magic answers. I think [Fannie Mae and Freddie Mac] were invented to deal with this kind of issue, and we should be used to our full extent.

Do you think standards of [underwriting mortgages] were a big cause of our current problems?

Our current problem is caused by three things. One is that for the first time in history we have the world's largest emerging economy being a net exporter of both capital and labour. Now we all know about capital, that's increased liquidity. Because they've exported labour, it's kept inflation down, and there's a lot of central banks worldwide that have relatively lower rates. The second thing is advances in technology have de-institutionalised the mortgage market and made it much more spread around and diversified . . . The third thing is the old tension between fear and greed, and greed won out for a while. That's why I think to fix this over the longer run, you have to fix the mortgage brokerage business and the origination business . . . I am a very, very strong proponent [of] having some sort of national registration system and set of standards for mortgage brokers.

How is this credit turbulence going to affect the US housing market?

It's already had a very, very dramatic effect obviously in the housing market. Some parts of the housing market are literally frozen up. It has introduced an enormous amount of fear, and I use that word advisedly, into large parts of the household sector about what's going to happen to them when they get to reset [their mortgage rates] . . . I think this is a substantial depressive to the overall economy . . . I would put the possibility [of a US recession] in the 40 to 45 per cent range.

Given those risks, have the US authorities done enough to respond to the credit squeeze?

The US authorities have taken it seriously. They have acted in a pretty dramatic way to deal with it. I do think this is a little bit of a different situation. Monetary policy for example, we used to say when I was on the [committee of the Federal Reserve that sets US interest rates] is a very blunt tool . . . It's not a panacea either for remedying this, which is one reason you should use [Fannie Mae and Freddie Mac] more aggressively.