Legislation that could force Fannie Mae and Freddie Mac to significantly reduce their investment portfolios was released Friday by Senate Banking Committee Chairman Richard C. Shelby, R-Ala., the Washington Post reported.

By proposing to give a new regulator broad discretion over the kinds of assets Fannie Mae and Freddie Mac can hold, Shelby has followed the course preferred by the Bush administration – but set up a possible conflict with the House, where Financial Services Committee Chairman Michael G. Oxley, R-Ohio, supports a less strict set of rules, the Post reported.

Oxley has also been working toward a set of rules for the mortgage giants, whose combined investment portfolios total $1.5 trillion.

Fannie Mae has been shrinking its portfolio to bolster its capital cushion and meet regulatory requirements as it struggles to resolve accounting problems uncovered by the Office of Federal Housing Enterprise Oversight last year that led to the possible restatement of as much as $12 billion in previously reported earnings.

Both the White House and Federal Reserve Chairman Alan Greenspan say Fannie Mae and Freddie Mac pose a risk to the economy because they have grown too large. Shelby plans to bring his bill before the Banking Committee Thursday, the Post reported

“I am hopeful that the Committee will be able to pass this strong, meaningful legislation. The new regulator simply must be able to ensure the safe and sound operations of [the two companies] while they pursue their mission in a manner that does not pose systemic risk” to the economy, Shelby said Friday, the Post reported.

In December 2004, Fannie Mae replaced Franklin Raines, its chairman and CEO, who announced he was taking early retirement, and Fannie Mae’s chief financial officer, Timothy Howard, resigned Dec. 21.

Fannie Mae’s financial accounting troubles have drawn shareholder lawsuits and investigations by the Justice Department and the Securities and Exchange Commission.

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