Forward looking 25 year horizon estimated that the

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forward-looking 25-year horizon, estimated that the aggregate value of the subsidy ranged somewhere between $119 billion and $164 billion, of which shareholders receive respectively between $50 and $97 billion. Astonishingly, the subsidy was almost equal to the market value of these two GSEs, providing further evidence against the desirability of their existence in their current form. 8 Year after year, a large number of economists and policy-makers questioned the distortions that were being created by this “big fat” subsidy. In what is perhaps one of the more eloquent summaries of subsidy-related distortions, a speech on May 19, 2005, by the then Federal Reserve Chairman Alan Greenspan explains the growth of GSE balance sheets and their guarantee-driven shareholder value: 9 “Although prospectuses for GSE debt are required by law to stipulate that such instruments are not backed by the full faith and credit of the U.S. government, investors worldwide have concluded that our government will not allow GSEs to default… Investors have provided Fannie and Freddie with a powerful vehicle for achieving profits that are virtually guaranteed through the rapid growth of their balance sheets, and the resultant scale has given them an advantage that their potential private-sector competitors cannot meet. As a result, their annual return on equity, which has often exceeded 30 percent, is far in excess of the average annual return of approximately 15 percent that has been earned by other large financial competitors holding substantially similar assets. Virtually none of the GSE excess return reflects higher yields on assets; it is almost wholly attributable to subsidized borrowing costs… The Federal Reserve Board has been unable to find any credible purpose for the huge balance sheets built by Fannie and Freddie other than the creation of profit through the exploitation of the market-granted subsidy.”
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26 Chapter 2: Ticking Time Bomb “We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.” - Charles Duhigg, New York Times , October 5, 2008 On October 28, 1992, President George H.W. Bush signed into law H.R. 5334, “The Housing and Community Development Act of 1992”. As described in Chapter 1 above, Title XIII of the law, Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA), created rules for the two largest government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. In his remarks, President Bush said: “This legislation addresses the problems created by the rapid expansion of certain GSEs in the last decade. It establishes a means to protect taxpayers from the possible risks posed by GSEs in housing finance. The bill creates a regulator within the Department of Housing and Urban Development (HUD) to ensure that the housing GSEs are adequately
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