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Article
Publication date: 1 March 1999

Ron Feldman

Fannie Mae and Freddie Mac receive explicit and implicit off-budget subsidies from the federal government. This paper reviews the methods to estimate the dollar amount of the…

Abstract

Fannie Mae and Freddie Mac receive explicit and implicit off-budget subsidies from the federal government. This paper reviews the methods to estimate the dollar amount of the subsidies. None of the three techniques to estimate the indirect subsidy yield accurate point estimates. They do suggest that Fannie and Freddie could receive billions of dollars in subsidies in some years and much smaller amounts in other years. However, assessing the size of the implied subsidies is most valuable in demonstrating that Fannie and Freddie, not the federal government, control their size. Efforts to improve federal control face significant difficulties including informational asymmetries and the political incentives that have led to the status quo. These drawbacks bolster the rationale for eliminating federal support for Fannie and Freddie.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 11 no. 1
Type: Research Article
ISSN: 1096-3367

Article
Publication date: 3 August 2012

Patrick Trutwein, Dirk Schiereck and Matthias Thomas

This paper investigates the link between equity and credit markets for the government‐sponsored mortgage institutions, Fannie Mae and Freddie Mac, during the period from January…

Abstract

Purpose

This paper investigates the link between equity and credit markets for the government‐sponsored mortgage institutions, Fannie Mae and Freddie Mac, during the period from January 2007 until December 2008. Before the financial crisis, investors perceived these real estate finance institutions as quasi state guaranteed.

Design/methodology/approach

By examining Fannie Mae and Freddie Mac during 2007 and 2008, this study extends existing research on the link between equity and credit markets. The authors employ univariate time series regression and vector autoregressive models to analyze the comovements over time and the lead‐lag relationship for equity returns, CDS spread changes, and bond spread changes.

Findings

The results provide evidence for equity returns and credit spreads of CDS and bonds being inversely related and adjusting simultaneously. The relationship between equity and credit markets intensifies during periods of heightened risks. The link between equity returns and bond spread changes is more robust in an environment of slightly elevated risk, while the relationship between equity and CDS markets intensifies during times of extreme stress. It was also found that the link between equity and credit markets completely breaks down as government intervention in the form of regulatory changes and ultimately, conservatorship, materializes.

Practical implications

Investors active in equity and credit markets need to be aware of the relevance of the prevailing capital market regime and the role of external effects such as government support and bailout.

Originality/value

There is a growing body of empirical research employing event studies and regression analyses on the firm level to examine the link between equity and credit default swaps. Yet, to the authors' knowledge this relationship has not been explored specifically for quasi guaranteed institutions. However, given the growing number of at least partly state owned real estate finance institutions, this specific focus is important to understand future expected risk compensation of equity and credit investors. The paper ask what lessons are to be learnt from the current financial crisis about investor protection in quasi guaranteed financial institutions.

Article
Publication date: 24 July 2009

David Reiss

The purpose of this paper is to provide a brief introduction to the role of the Fannie Mae/ Freddie Mac duopoly in the American housing market.

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Abstract

Purpose

The purpose of this paper is to provide a brief introduction to the role of the Fannie Mae/ Freddie Mac duopoly in the American housing market.

Design/methodology/approach

First, the paper defines the “government sponsored enterprise,” which is the type of hybrid public/private entity that Fannie and Freddie are and provides an introduction to the other significant government sponsored enterprises. It then explains what Fannie and Freddie do in the American mortgage market and provides a brief history of how the two companies developed. Finally, it evaluates the two companies as duopolists in the conforming mortgage market.

Findings

The paper concludes by suggesting that the current financial crisis presents an opportunity to rethink whether the Fannie/Freddie duopoly continues to serve the public interest.

Research limitations/implications

Because of its length, the paper does not review alternative approaches to the status quo that the US Government can take to ensure that it has a stable federal housing finance policy.

Practical implications

The paper argues that the current financial crisis provides an opportunity to revisit the design of the structure of the US housing finance market.

Originality/value

The paper sets forth the rationale and legal basis for characterizing Fannie Mae and Freddie Mac as duopolists.

Details

Journal of Financial Regulation and Compliance, vol. 17 no. 3
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 1 April 2004

Joining Freddie Mac in April 2003, Martin F. Baumann is the Executive Vice President Finance and Chief Financial Officer. Baumann is responsible for the corporation's accounting…

Abstract

Joining Freddie Mac in April 2003, Martin F. Baumann is the Executive Vice President Finance and Chief Financial Officer. Baumann is responsible for the corporation's accounting, financial reporting, tax reporting, budgeting, capital oversight, economic research and analysis, and operational risk oversight. Prior to joining Freddie Mac, Baumann was a Partner at PricewaterhouseCoopers (PwC). He joined PwC in 1969, becoming a Partner in 1980, and also serving as Deputy Chairman World Financial Services Practice and as Global Banking Leader. Whilst ar PwC, he also served as the lead global relationship partner responsible for PwC services to such major companies as J.P. Morgan Chase, The World Bank and Prudential Financial. Here he speaks about the changing role of the CFO.

Details

The Journal of Risk Finance, vol. 5 no. 4
Type: Research Article
ISSN: 1526-5943

Book part
Publication date: 9 July 2010

Charles Perrow

This volume includes two major explanations of the meltdown that I critically discuss. The first is a “normal accident theory” arguing that the complexity and coupling of the…

Abstract

This volume includes two major explanations of the meltdown that I critically discuss. The first is a “normal accident theory” arguing that the complexity and coupling of the financial system caused the failure. Although these structural characteristics were evident, I argue that the case does not fit the theory because the cause was not the system, but behavior by key agents who were aware of the great risks they were exposing their firms, clients, and society to. The second interpretation is a neoinstitutional one, emphasizing that ideologies, worldviews, cognitive frames, mimicry, and norms were the source of behaviors that turned out to be disastrous for the elites and others. The implication is that elites were victims, not perpetrators. I argue that while ideologies, etc., can have real effects on the behavior of many firm members and society in general, in this case financial elites, to serve personal ends, crafted the ideologies and changed institutions, fully aware that this could harm their firms, clients, and the public. Complexity and coupling only made deception easier and the consequences more extensive. For anecdotal evidence I examine a decade of deregulation, examples of elected representative, regulatory officials, firms, and the plentiful warnings.

Details

Markets on Trial: The Economic Sociology of the U.S. Financial Crisis: Part A
Type: Book
ISBN: 978-0-85724-205-1

Content available
Book part
Publication date: 7 December 2022

Sophia Beckett Velez

Abstract

Details

Operational Risk Management in Banks and Idiosyncratic Loss Theory: A Leadership Perspective
Type: Book
ISBN: 978-1-80455-223-0

Article
Publication date: 1 March 1999

Robert S. Seiler

There are striking similarities between publicly-held government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac and investor-owned public utilities. Each firm…

Abstract

There are striking similarities between publicly-held government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac and investor-owned public utilities. Each firm enjoys large scale economies that give a significant competitive advantage over other companies, possesses a dominant market position that it may be able to exploit to earn profits above competitive levels, and has a strong incentive to enter new markets when the life cycle of its core markets constrain its ability to increase profits. The recent behavior of Fannie Mae and Freddie Mac indicates that the government must impose more stringent economic regulation on those GSEs in order to be sure that they achieve their public purposes.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 11 no. 1
Type: Research Article
ISSN: 1096-3367

Book part
Publication date: 10 May 2017

Randy K. Lippert, Stefan Treffers and Thomas Bud

This chapter seeks to classify condominium crime, explain its neglect in light of the growth of condo living in cities and closely consider the prospects for greater visibility…

Abstract

This chapter seeks to classify condominium crime, explain its neglect in light of the growth of condo living in cities and closely consider the prospects for greater visibility and legal regulation of these acts. We deploy traditional dichotomies of white-collar/street crime and insiders/outsiders to construct a two-dimensional typology of condo crime and illustrate each type using empirically grounded examples from extensive qualitative research in Ontario and New York State entailing analysis of media accounts, condo owner association and corporation websites, and numerous interviews with owners, board directors and industry actors. We argue that the condo form retains peculiar characteristics that tend to prevent public reporting of condo crimes and leaves the ‘usual suspects’ (i.e. street criminals) in the spotlight while other, potentially more damaging, acts are neglected. We conclude by discussing barriers to knowing the extent of condo crime and their relationship to legal regulation.

Details

Studies in Law, Politics, and Society
Type: Book
ISBN: 978-1-78714-344-9

Keywords

Article
Publication date: 3 May 2013

Muhammad Islam, Neil Seitz, James Millar, James Fisher and James Gilsinan

The desirability of financial reform to avoid another financial melt‐down is widely accepted, but the likelihood of reform is uncertain. The purpose of this paper is to present a…

Abstract

Purpose

The desirability of financial reform to avoid another financial melt‐down is widely accepted, but the likelihood of reform is uncertain. The purpose of this paper is to present a case study of evolution and reform attempts at US mortgage giants Fannie Mae and Freddie Mac and provides an instructive model of the likely long‐term success of attempts to reform the financial system.

Design/methodology/approach

A model of the legislative and regulatory change process is first developed, considering the range of influences that arise. The history of reform attempts for US government sponsored mortgage giants Fannie Mae and Freddie Mac are examined in the context of this model.

Findings

The model predicts that reform will often be thwarted. US government sponsored mortgage giants Fannie Mae and Freddie Mac helped fuel the housing bubble and required a government bail‐out. Sentiment for reform was high, but what happened next was – nothing. Fannie Mae and Freddie Mac have a long history of successful lobbying, and they succeeded again. They did not need to stop legislation. They needed only to see it delayed long enough for attention to turn elsewhere. Five years after the bubble broke, their market dominance and the implied guarantees continue. Reform is not on the legislative agenda. This outcome does not bode well for financial market reform or stability.

Originality/value

An understanding of the process, influences, and likelihood of reform is important for governments, businesses, and individuals. While the picture this paper paints is not optimistic, it is important.

Details

Journal of Financial Crime, vol. 20 no. 2
Type: Research Article
ISSN: 1359-0790

Keywords

Article
Publication date: 31 December 2015

Oonagh Anne McDonald

The purpose of this paper is to examine the basis of the complaints against banks which sold private label securities to Fannie Mae and Freddie Mac before the financial crisis…

Abstract

Purpose

The purpose of this paper is to examine the basis of the complaints against banks which sold private label securities to Fannie Mae and Freddie Mac before the financial crisis. The examination shows that all but one of the cases was settled out of court. Nomura and RBS went to court, but the case against them was based on dubious evidence and on strict liability which only enabled the judge to set aside relevant evidence. The Securities and Exchange Commission’s evidence against senior executives of Fannie and Freddie shows that they deliberately purchased PLSs based on subprime loans to meet the government’s housing targets.

Design/methodology/approach

The research was based on publicly available documents, including details of the Federal Housing Finance Agency’s (FHFA) complaints against the banks in question, the settlement agreements published by the DoJ, FHFA and SEC. Furthermore, it includes documentary evidence from the Financial Crisis Inquiry Committee and Senate Committees, the full transcript of the trial, opinions of the judge for the trial and the judgement.

Findings

The findings are that many have concluded that settlements out of court fail to satisfy the demand for justice. They have been criticised as a trade-off between the prosecutor and the bank, with a view that the imposition of large fines is to pay back taxpayers’ money spent on rescuing the banks, rather than punishing those responsible. Such fines do little, if anything, to change the behaviour of banks. As a result, the Department of Justice issued a memorandum on 9 September to focus on individual accountability for corporate wrongdoing. It remains to be seen how many cases against senior executives will result from the change in direction.

Research limitations/implications

The implications of the research are that it is important even in the aftermath of such a serious if not devastating financial crisis to ensure that the laws are properly applied and can stand up to any challenge that it has been stretched to obtain the results the administration of the day wants to see. In addition, care must be taken over both the imposition of large fines and the use to which the monies should be put. All the parties involved in bringing about the crisis should be held to account. The major cases against the banks have almost all been “resolved”. A change in direction has now taken place.

Practical implications

The practical implications of holding individuals to account should now be tackled. It requires a careful examination of the laws and regulations already in place to ensure that it is clear within a bank as to who is responsible for what. It will only be possible to hold senior individuals to account if the laws are clear and if all the evidence is not hidden. It may also require a review of the contracts under which senior executives are employed, because to remove a person from his post and then find that he still has a large pension pot and bonuses due may not result in justice either. A delicate balancing act is required because banks require highly competent and motivated individuals to run them.

Social implications

If a very large fine is imposed on a bank, the shareholders and customers pay. The shareholders will mostly own the shares through their pensions and their savings in mutual funds.

Originality/value

There have been few studies of all the cases against the banks brought by the DoJ and FHFA and still fewer have recognized the fact that government housing policy was the source of the extent of the subprime mortgages.

Details

Journal of Financial Crime, vol. 23 no. 1
Type: Research Article
ISSN: 1359-0790

Keywords

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