The following is a transcript of U.S. Treasury Secretary Timothy Geithner's comments to the Conference on the Future of Housing Finance regarding Fannie Mae and Freddie Mac, the nation's government-sponsored enterprises (GSEs). In his testimony, Geithner virtually calls for the end of Fannie Mae and Freddie Mac as ineffective.
"It is not tenable to leave in place the system we have today, "said Geithner in his testimony. The following is the remainder of Geithner's remarks:
"Today, we consider the challenge of how to build a more stable housing finance system.
"Fixing this system is one of the most consequential and complicated economic policy problems we face as a country. And I think it's worth stepping back and asking the basic questions: What went wrong over the past few years? And what are the most important flaws in the system that we have to fix?
"Alongside the broader failures that contributed to this financial crisis, there are several that directly involved the government-sponsored entities, Fannie Mae and Freddie Mac.
"Amid the general race to the bottom in standards across the private sector, Fannie and Freddie lowered their underwriting standards, providing guarantees for increasingly risky types of mortgages without charging nearly enough to cover the risk. And Fannie and Freddie were allowed to build up substantial portfolios of mortgage-backed securities, which rose to a level of more than $1.6 trillion dollars at their peak, without the financial resources to cover potential losses.
"These two strategies were pursued to maximize short-term returns to shareholders and senior management. They were possible only because of the toxic combination of a perceived guarantee by the government and an absence of effective oversight. They were not the sole causes of the crisis, but they made the financial crisis worse. And they resulted in huge losses for the taxpayer.
"Now, these failures in our housing finance system were avoidable. And it is our responsibility to make sure that we create a system that is not vulnerable to these same failures happening again.
"Toward that end, earlier this year, we posed a set of key policy questions for public comment and we've received more than 300 responses covering a full range of opinion.
"Some propose getting the government completely out of the business of supporting housing finance, while others propose reforms that would leave the current system largely in place.
"Some suggest that, as a government, we have provided too much support for housing, while others suggest we provided too little support to promote affordability for lower income Americans. It's safe to say there's no clear consensus yet on how best to design a new system. But this Administration will side with those who want fundamental change.
"It is not tenable to leave in place the system we have today ....
"And I want to start the conference today by presenting what I think are the four key questions underlying reform and outline some of the key policy choices we face in answering them.
"The first is the most fundamental."