Following testimony by Alan Greenspan, key members of Congress have begun to focus on the retained mortgage and mortgage-backed securities (MBS) portfolios of Fannie Mae and Freddie Mac as a major source of the risk they pose to taxpayers and the economy in general. Chairman Richard Shelby of the Senate Banking Committee has promised to consider some kind of limitation on these investments in the legislation he is preparing, and Chairman Richard Baker of the House Subcommittee on Capital Markets has already included in his regulatory enhancement bill authority for the regulator of Fannie Mae and Freddie Mac to reduce the size of their portfolios.

This promises to be the most contentious issue in the fight over new regulation of government-sponsored enterprises. Fannie and Freddie's supporters argue that restricting their investment in mortgages and MBS will increase mortgage rates. Opponents argue that accumulating portfolio investments increases the risks the two companies create without significantly reducing rates. Which of these views is more likely to be correct, and how is the issue likely to play out on Wall Street and in Congress? This conference will consider these questions.