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Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking

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  • W. Scott Frame
  • Larry Wall

Abstract

The federal government has an interest in the financial stability of Fannie Mae and Freddie Mac because of their importance to financial markets and the government's implicit guarantee of their liabilities. ; In October 2000 these two housing government-sponsored enterprises (GSEs) announced six voluntary initiatives. One initiative would enhance market discipline by having the GSEs issue subordinated debt. A second would boost liquidity by having the GSEs maintain a liquid securities portfolio. The other four initiatives would increase transparency by having the GSEs disclose their credit and interest rate losses under certain scenarios, obtain a credit rating for the government's exposure to loss, and disclose whether the GSEs comply with certain capital adequacy standards. ; This article evaluates the initiatives from the perspective of current banking standards. The analysis suggests that the initiatives are beneficial but could be made more effective. The authors point out that the contribution of the subordinated debt initiative depends largely on whether investors believe the implicit guarantee extends to subordinated debtholders. The need for the liquidity initiative has not been established, the authors conclude, and can be criticized as allowing the GSEs to earn a credit spread. The most important of the disclosure initiatives, the one for interest rate risk, will provide some new information but could be more informative if it summarized a wider set of interest rate scenarios.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2002)
Issue (Month): Q1 ()
Pages: 45-59

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Handle: RePEc:fip:fedaer:y:2002:i:q1:p:45-59:n:v.87no.1

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Keywords: Government-sponsored enterprises ; Federal Home Loan Mortgage Corporation ; Federal National Mortgage Association ; Federal home loan banks;

References

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  1. Richard Scott Carnell, 2001. "Federal Deposit Insurance versus federal sponsorship of Fannie Mae and Freddie Mac: the structure of subsidy," Proceedings 738, Federal Reserve Bank of Chicago.
  2. W. Scott Frame & Larry Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
  3. Robert A. Eisenbeis & Larry D. Wall, 2002. "Reforming deposit insurance and FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-16.
  4. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt as bank capital: a proposal for regulatory reform," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 40-53.
  5. Hugh Cohen, 1993. "Beyond duration: measuring interest rate exposure," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 23-31.
  6. Amihud, Yakov & Mendelson, Haim, 1991. " Liquidity, Maturity, and the Yields on U.S. Treasury Securities," Journal of Finance, American Finance Association, vol. 46(4), pages 1411-25, September.
  7. George J. Benston & George G. Kaufman, 1997. "FDICIA after Five Years," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 139-158, Summer.
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Cited by:
  1. Karsten Jeske & Dirk Krueger & Kurt Mitman, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," PIER Working Paper Archive 11-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Dirk Krueger & Karsten Jeske, 2005. "Housing and the Macroeconomy: The Role of Implicit Guarantees for Government Sponsored Enterprises," 2005 Meeting Papers 242, Society for Economic Dynamics.
  3. Robert Eisenbeis & W. Frame & Larry Wall, 2007. "An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac and An Evaluation of the Policy Options for Reducing Those Risks," Journal of Financial Services Research, Springer, vol. 31(2), pages 75-99, June.
  4. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 24(1), pages 5-29, August.
  5. Lawrence White & W. Scott Frame, 2004. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Working Papers 04-27, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Mark J. Flannery & W. Scott Frame, 2006. "The Federal Home Loan Bank system : the "other" housing GSE," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 33-54.
  7. Frank A. Schmid, 2005. "Stock return and interest rate risk at Fannie Mae and Freddie Mac," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 35-48.
  8. Dwight M. Jaffee, 2006. "Controlling the Interest Rate Risk of Fannie Mae and Freddie Mac," NFI Policy Briefs 2006-PB-04, Indiana State University, Scott College of Business, Networks Financial Institute.
  9. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2013. "Housing, mortgage bailout guarantees and the macro economy," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 917-935.

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