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

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  • W. Scott Frame
  • Larry D. 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.

Suggested Citation

  • W. Scott Frame & Larry D. Wall, 2002. "Fannie Mae's and Freddie Mac's voluntary initiatives: Lessons from banking," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 45-59.
  • Handle: RePEc:fip:fedaer:y:2002:i:q1:p:45-59:n:v.87no.1
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    File URL: http://www.frbatlanta.org/filelegacydocs/frame_wall2.pdf
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    References listed on IDEAS

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    1. Robert A. Eisenbeis & Larry D. Wall, 2002. "Reforming deposit insurance and FDICIA," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-16.
    2. Richard S. 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.
    3. Hugh Cohen, 1993. "Beyond duration: measuring interest rate exposure," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 23-31.
    4. W. Scott Frame & Larry D. Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
    5. 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.
    6. 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.
    7. 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 1411-1425, September.
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    Citations

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    Cited by:

    1. Dirk Krueger & Karsten Jeske, 2004. "Housing and the Macroeconomy: The Role of Implicit Guarantees for Government Sponsored Enterprises," 2004 Meeting Papers 100, Society for Economic Dynamics.
    2. Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," CEPR Discussion Papers 8624, C.E.P.R. Discussion Papers.
    3. Robert N. Collender & Samantha Roberts & Valerie L. Smith, 2007. "Signals from the Markets for Fannie Mae and Freddie Mac Subordinated Debt," Staff Working Papers 07-04, Federal Housing Finance Agency.
    4. 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.
    5. 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;Western Finance Association, vol. 31(2), pages 75-99, June.
    6. Robert N. Collender, 2008. "Enterprise Credit Default Swaps and Market Discipline – Preliminary Analysis," Staff Working Papers 08-02, Federal Housing Finance Agency.
    7. Wall, Larry D. & Eisenbeis, Robert A. & Frame, W. Scott, 2005. "Resolving large financial intermediaries: Banks versus housing enterprises," Journal of Financial Stability, Elsevier, pages 386-425.
    8. 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.
    9. Mark J. Flannery & W. Scott Frame, 2006. "The Federal Home Loan Bank system : the "other" housing GSE," Economic Review, Federal Reserve Bank of Atlanta, pages 33-54.
    10. W. Scott Frame & Lawrence J. White, 2005. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Journal of Economic Perspectives, American Economic Association, pages 159-184.
    11. 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.
    12. Robert S. Seiler, 2003. "Market Discipline of Fannie Mae and Freddie Mac," Staff Working Papers 03-04, Federal Housing Finance Agency.
    13. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer;Western Finance Association, vol. 24(1), pages 5-29, August.

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