One of the principal consequences of the Enron collapse is a recognition that audited financial statements and the endorsements of analysts do not amount to assurance for investors that their investments are safe and sound.

After Enron, we’ve had Global Crossing, Adelphia and Tyco-all companies that were high fliers not so long ago, with audited financial statements showing substantial profits and the strong endorsements of analysts at the major securities firms.

The lesson here is that there is no point at which investors can say they have enough information, and no investor who would not benefit from more and better disclosure. The protestations of CEOs and company spokespersons that the company is in sound financial condition, investors now know, should not necessarily be taken at face value. As Ronald Reagan was fond of saying, "Trust but verify."

Especially is this true of Fannie Mae and Freddie Mac, which enjoy the wide support of analysts, and have audited financial statements, but as we will hear today are taking risks of which investors may not be aware.

In addition, and certainly equally important, financial difficulties at Fannie Mae or Freddie Mac could cause losses for the taxpayers, and disruptions in the housing finance market, in addition to losses for investors. So there are good policy reasons for exposing the financial condition of these two companies to the broadest and most intensive kind of public scrutiny.

However, despite these strong reasons for imposing a strict disclosure regime on Fannie Mae and Freddie Mac, Congress has done the opposite. Among their many advantages is an exemption from the requirement imposed on all other publicly held companies to register their securities and file annual and periodic reports with the SEC.

Although Fannie Mae has said that it complies with all SEC requirements anyway, this voluntary compliance has its limits.

A case in point is their proxy statement, which until last year could only be obtained-unless you were a shareholder-by writing to the company. The importance of the proxy statement is that it was the only place where the compensation of Fannie’s management was disclosed. It was only after last year’s proxy statement was posted on AEI’s website, and after it became clear that this would happen every year, that the company decided to post its proxy statement on its website.

Moreover, as the OMB pointed out in a recent letter to OFHEO, the problem with voluntary compliance is that it can mean compliance stops just when it is most necessary.

So both investors, homebuyers and taxpayers would benefit if Fannie Mae and Freddie Mac were required to register their securities with the SEC and file regular reports.

What would investors learn that they don’t already know? Today’s conference will go some distance toward answering that question.

There are two general circumstances in which a public company must disclose information to and through the SEC: when it is reporting about itself-its own financial condition-and when it is selling its securities.

In our first panel today, Bert Ely will compare the information made available by banks and thrifts in their financial statements-which are filed with the SEC-and the information made available by Fannie and Freddie. He finds that while Fannie and Freddie have less than half the capital of banks and thrifts they bear more interest rate risk and they hedge that risk only in part. This is important information for investors in the equity securities of Fannie Mae and Freddie Mac, who may not understand that an investment in a bank or thrift may involve less risk, and while it is not certain that the SEC would require that this information be disclosed, it is certain that it won’t be disclosed without SEC registration.

In the same panel, Scott Frame and Larry Wall of the Atlanta Fed review the voluntary steps that Fannie and Freddie have taken to reassure critics about their financial condition without actually subjecting themselves to any required disclosures. These steps are reviewed in relation to similar disclosures-although mandatory-by banks.

In the second panel, Dwight Jaffee attempts to measure the risk Fannie and Freddie are retaining, and to estimate the effect on their market value of interest rate moves of varying sizes. He determines that this is not possible without more disclosure by both firms, and proposes a number of disclosures that Fannie and Freddie should make in order adequately to inform the market about their sensitivity to interest rate changes. Again, if Fannie and Freddie were required to register their securities with the SEC, it is likely that they would be required to report this important information.

The second panel will also discuss the other disclosures that Fannie and Freddie will have to make if they are required to register their mortgage backed securities with the SEC. These disclosures will provide important information to investors about the prepayment risk on portfolios of mortgages that back Fannie and Freddie’s MBS.

In this case, we can be reasonably sure exactly what additional data will be required by the SEC, because we have examples of prospectuses used by other sellers of MBS that have been registered with the SEC, and those prospectuses include a great deal more information than Fannie and Freddie provide. At the side of the room, you can see a stack of 10 copies of a prospectus used by Chase for its MBS, and 10 copies of a prospectus used by Fannie Mae. The Chase prospectus is considerably longer and more detailed, especially with respect to the information of key interest to investors. In the packages we supplied is a summary of the informational differences between the two. The Chase prospectus contains information about the individual loans in the portfolio, and thus allows an investor to make a determination about the prepayment risk of the portfolio; the Fannie prospectus does not contain this information. Yet how quickly a portfolio of MBS will prepay is the information that investors need most in order to assess the portfolio’s value.

This is another area where registration of Fannie and Freddie with the SEC would provide vitally important information to investors that could actually lower interest rates.

How this would come about is discussed by Steve Thomas in his paper, which also addresses the argument that requiring Fannie and Freddie to register their MBS with the SEC will disrupt the housing finance market. Thomas finds that argument completely without merit. He also discusses the troubling question of whether Fannie and Freddie use the superior individual loan information they have-and have not disclosed-to adversely select against the market when they repurchase MBS.

Now we come to the reason this conference is timely. Our keynote speaker today, Congressman Chris Shays, along with Congressman Edward Markey, has introduced HR 4071, a bill that would remove the SEC exemption of Fannie Mae and Freddie Mac.

Congressman Shays is probably most well known at this point as a joint author of the controversial campaign finance reform legislation known as Shays-Meehan. That was a successful multi-year effort against strong opposition, but I’d venture to say that the entire campaign finance system is one thing-Fannie and Freddie, as you probably know by now, is quite another. All I can say is that it reminds me of another expression of Ronald Reagan: "You ain’t seen nothin’ yet!"