The Rescue of Fannie Mae and Freddie Mac

55 Pages Posted: 18 Aug 2015

See all articles by W. Scott Frame

W. Scott Frame

Federal Reserve Bank of Dallas

Andreas Fuster

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Joseph S. Tracy

National Bureau of Economic Research (NBER); Federal Reserve Bank of Dallas

James I. Vickery

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: 2015-03-01

Abstract

We describe and evaluate the measures taken by the U.S. government to rescue Fannie Mae and Freddie Mac in September 2008. We begin by outlining the business model of these two firms and their role in the U.S. housing finance system. Our focus then turns to the sources of financial distress that the firms experienced and the events that ultimately led the government to take action in an effort to stabilize housing and financial markets. We describe the various resolution options available to policymakers at the time and evaluate the success of the choice of conservatorship, and other actions taken, in terms of five objectives that we argue an optimal intervention would have fulfilled. We conclude that the decision to take the firms into conservatorship and invest public funds achieved its short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship led to tensions between maximizing the firms’ value and achieving broader macroeconomic objectives, and, most importantly, it has so far failed to produce reform of the U.S. housing finance system.

Keywords: Fannie Mae, Freddie Mac, housing finance, financial crisis, government intervention

JEL Classification: G01, G21, H12

Suggested Citation

Frame, W. Scott and Fuster, Andreas and Tracy, Joseph and Vickery, James Ian, The Rescue of Fannie Mae and Freddie Mac (2015-03-01). Available at SSRN: https://ssrn.com/abstract=2646042 or http://dx.doi.org/10.2139/ssrn.2646042

W. Scott Frame (Contact Author)

Federal Reserve Bank of Dallas ( email )

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Andreas Fuster

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
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CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

Joseph Tracy

National Bureau of Economic Research (NBER) ( email )

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Federal Reserve Bank of Dallas ( email )

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James Ian Vickery

Federal Reserve Bank of Philadelphia ( email )

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Philadelphia, PA 19106
United States
+12155746549 (Phone)

HOME PAGE: http://www.vickeryjames.com

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