Skip to main content

Fannie and Freddie: an overview

Today's print edition of the Financial Times carried some excellent coverage of the ongoing crisis surrounding Fannie Mae and Freddie Mac.

Since their analysis is far superior to anything I could offer on the subject, I thought we'd take a look at what the FT has to say on the history of the two GSEs, current market sentiment towards the mortgage giants' shares and debt, and the likely outcome of any government "backstop" or bailout plans.

First off, John Authers and Stephanie Kirchsgaessner provide a bit of historical overview on Fannie and Freddie in their piece entitled, "Moral hazard on the road to increasing profits".

Here are a few key excerpts from their article:

"Many US economists, on the right and the left, are today able to say: “I told you so.” Few developments in US financial policy over the past half century have been more controversial than the decision to allow Fannie Mae and Freddie Mac to develop to their great size as private shareholder-owned institutions.

Fannie Mae (originally the Federal National Mortgage Agency) had its roots in New Deal legislation of the 1930s. It was set up in 1938 as a government-owned development bank. Its purpose was to ensure that mortgage interest rates would stay at low levels that kept home ownership within the reach of the US middle class.

In 1968, the decision was made to re-charter the FNMA as a private entity, funded entirely by shareholders. As it continued to operate under an explicit mandate from the government, however, the belief took hold that Fannie Mae enjoyed an explicit guarantee from the government.

The complaint was that private sector institutions could not possibly compete against a company that in effect held a government guarantee. To address this complaint, Freddie Mac (the Federal Home Loan Mortgage Corporation) was chartered in 1970, with a similar mission to ensure stability, liquidity and affordability, and to compete with Fannie.

But this did not quiet the objections. First, the existence of the agencies was held to create “moral hazard” – the mere presence of such a guarantee, it was held, would create an incentive for excessive risks. As it was obvious the government could not allow the agencies to go bust, capitalism’s normal controls against risk-taking would not work. "

Be sure to read the whole thing, as the authors explain the "crowding out" effect that the two GSEs had on the private sector's involvement in the US mortgage market.

"A history of Freddie Mac and Fannie Mae" provides a brief timeline spanning Fannie Mae's and Freddie Mac's initial chartering, up to their present difficulties, along with an easy to understand graphic on "How the US mortgage markets work". Very handy for quick reference.

In, "Effort unlikely to improve lot of homeowners", Saskia Scholtes describes how, "the US government's efforts to quell the crisis -surrounding Fannie Mae and Freddie Mac will affect different constituencies.". Read on for a concise overview of how forthcoming plans will affect homebuyers, debt investors, equity investors, and foreign investors.

Henry Sender describes how the focus of Wall Street's "take under" trade has shifted from Fannie and Freddie to the rest of the financial sector, as traders look to short banks and financial institutions who seem to be at risk of going under.

And lastly, Neil Dennis provides an update on how investors are reacting to proposed rescue plans for Fannie and Freddie in, "Ailing sentiment hits dollar and global stocks".

We'll have more on Fannie and Freddie in our next post. Stay tuned.

Popular posts from this blog

Jesse Livermore: How to Trade in Stocks (1940 Ed. E-book)

If you've been around markets for any length of time, you've probably heard of 20th century supertrader, Jesse Livermore . Today we're highlighting his rare 1940 work, How to Trade in Stocks (ebook, pdf). But first, a brief overview of Livermore's life and trading career (bio from Jesse Livermore's Wikipedia entry). "During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly. Ironically, Livermore sometimes did not follow his rules strictly. He claimed that lack of adherence to his own rules was the main reason for his losses after making his 1907 and

New! Finance Trends now at

Update for our readers: Finance Trends has a new URL!  Please bookmark our new web address at Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner .   Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead! As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter . You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter).  Stay up to date with our real-time insights and updates on Twitter .

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi