Federal Reserve Chairman Alan Greenspan, a fierce advocate of limiting the size of Fannie Mae's and Freddie Mac's portfolios, is now wringing his hands over the size and complexity of their hedging strategies.In a Sept. 2 letter to Sen. Robert Bennett, R-Utah, released Thursday morning, Mr. Greenspan writes that "[a]s Fannie and Freddie increase in size relative to the counterparties for their hedging transactions," their ability "to quickly correct the inevitable misjudgments inherent in their complex hedging strategies becomes more difficult." The letter adds that "excessive caution" in reducing their portfolios could destabilize the U.S. financial system and eventually diminish the availability of mortgage money to consumers. Fannie and Freddie hedge their portfolio risk by investing in derivatives through Wall Street.
