US Financial Crisis: Fannie Mae and Freddie Mac at the Core



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Code : ECC0022

Year :
2008

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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Abstract: The mortgage finance giants, Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), which were actually incorporated to support the US home market after the Great Depression of the 1930s, incurred huge losses and ultimately went into conservatorship. According to many economists, the business model of twin giants is responsible for the failure. Their status as Government Sponsored Enterprise (GSE) proved advantageous to them in terms of high leverage and tax exemptions. Over the years, the companies, under the mask of GSE enjoyed many privileges over their competitors by lobbying the politicians and passing regulations in their favour. However, both the giants, which entered into the subprime lending because of growing political pressure and competition in the 1990s, have by the middle of 2008 become the major holders of mortgage debt. The companies with their mounting losses posed serious threat to US as well as global financial sector. On September 7th 2008, the Federal government took over the worst wounded twins of subprime mortgage debacle.

This case dwells upon the reasons for the bailout of Fannie Mae and Freddie Mac. It briefly analyses the changing operations of twin giants over a period. It helps in debating 1) Is the business model of giants responsible for failure? 2) Is the decision of bailout wise on part of the federal government, which saved the giants from owning up their mistakes? 3) Should the model be continued after conservatorship?

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Pedagogical Objectives:

  • To understand the involvement of Fannie Mae and Freddie Mac in the US Financial Crisis
  • To analyse the reasons behind the bailout of Fannie Mae and Freddie Mac
  • To analyse the flawed business model of Fannie Mae and Freddie Mac.

    Keywords :Financial Crisis, US Financial Crisis, Fannie Mae, Freddie Mac, Subprime, Housing, Interest Rates, Leverage, MBS, Credit, Retail Credit, CDO's, Mortgages

    Contents :
    Fannie Mae and Freddie Mac
    The Failure of Mortgage Giants: Federal Takeover
    The Bailout of Fannie Mae and Freddie Mac


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