Bernanke comments on subprime crisis

NEW YORK (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke warned Congress on Thursday that raising the ceiling on the size of loans mortgage finance enterprises Fannie Mae and Freddie Mac can buy could undermine market discipline.

Bernanke said that if Congress were to raise the so-called conforming loan limit imposed on the two government-sponsored enterprises, or GSEs, from its current $417,000, lawmakers should move swiftly enough to make sure the move serves its intended purpose of easing current strains in the mortgage market.

"The perception, however inaccurate, that the GSEs are fully government-backed implies that investors have few incentives in their role as counterparties or creditors to act to constrain GSE risk-taking," Bernanke said in testimony obtained by Reuters that was prepared for delivery to the U.S. House of Representatives Financial Services Committee.

COMMENTS:

STEPHEN STANLEY, CHIEF ECONOMIST, RBS GREENWICH CAPITAL

MARKETS, GREENWICH, CONNECTICUT:

"Bernanke's comments so far seem kind of non-descript, and comments specific to the mortgage industry were pretty self-evident. We thought that if he says anything provocative that would come in the question and answer period. Given the topic of the hearing it will be mortgage-related but he may say more about the rate cut" by the Fed on Tuesday.

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR &

ASSOCIATES, TORONTO:

"All the things he talks about in terms of subprime and so on that's very strong support for the 50 basis point in the discount rate. There is a credit crunch and you need liquidity short term. Personally, I think the decision to go 50 basis points on the fed funds is a lot more controversial."

PETER KENNY, MANAGING DIRECTOR, KNIGHT EQUITY MARKETS, JERSEY

CITY, NEW JERSEY:

"This is a good counterbalance to the emotional whipsaw we saw in the market after the interest rate cuts. This is a tool he has at his disposal that is highly effective, his ability to use his addresses to the Hill to temper the moves that the Fed makes on the hard data side.

"He clearly indicates he expects to see not so much turmoil but rather more adjustments in the housing markets."

DUSTIN REID, SENIOR CURRENCY STRATEGIST, ABN AMRO, CHICAGO:

"It's pretty clear (Bernanke) expects more weakness in the housing sector, but the fact that he says the market is self-correcting leads me to believe he expects the system to work itself out without too much help from the Fed. That's what I took away from the Fed rate move and statement two days ago: they decided to front-load rate cuts, said they were relatively concerned about inflation, and didn't want to get into a prolonged rate-cutting cycle."

MATTHEW MOORE, ECONOMIC STRATEGIST, BANC OF AMERICA SECURITIES,

NEW YORK:

"There was nothing particularly surprising in Bernanke's remarks so far for the bond market. The bigger (market) potential right now is from Treasury Secretary Paulson's support for the government-sponsored entities temporarily purchasing or securitizing jumbo mortgages.

"I would watch the Bernanke Q&A very carefully. We got very little color from the FOMC statement on what the Fed thinks the economy is actually doing."

DAVID SLOAN, SENIOR ECONOMIST, 4CAST LTD, NEW YORK:

"I don't think there are any major shocks, he has basically reiterated the stance of the FOMC statement and he does clearly see more pain ahead in the housing market so I think it reiterates a dovish stance."