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The special private corporation status of these gses

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Unformatted text preview: The special private corporation status of these GSEs meant that the government – the Treasury – could inject capital into them, on terms that the GSEs agreed to, all while their debt had been perceived as being implicitly guaranteed by the government and while the GSEs had themselves taken full advantage of that perception to expand their balance sheets to unreachable heights in the context of private corporations. 5.2.2 First Rescue Attempts Regulators and policy makers alike tried to assure the public that the GSEs were solvent while in the background they pieced together the emergency rights to take over Fannie and Freddie, even while the two enterprises remained publicly traded companies. Finally, in the wake of the collapsing stock prices, on July 13, 2008, Treasury Secretary Henry Paulson announced that he had obtained the “bazooka”: a potential government bailout of unprecedented scale that would signal a confidence-boosting effort to backstop the GSEs in coordination with the Federal Reserve. The plan increased the line of credit that was available to the GSEs from the Treasury; it established the right for the Treasury to purchase equity in the 67 GSEs; and introduced a consultative role for the Federal Reserve in a reformed GSE regulatory system. On the same day, the Federal Reserve announced that the Federal Reserve Bank of New York would have the right to lend to the GSEs as necessary. The Housing and Economic Recovery Act of 2008, signed into law on July 30, 2008, expanded regulatory authority over Fannie Mae and Freddie Mac by the newly established Federal Housing Financing Agency. It also gave the U.S. Treasury the authority to advance funds for the purpose of stabilizing Fannie Mae or Freddie Mac, limited only by the amount of debt that the entire federal government is permitted by law to commit to. The law raised the Treasury's debt ceiling by $800 billion, in anticipation of the potential need for the Treasury to have the flexibility to support Fannie Mae, Freddie Mac, or the Federal Home Loan Banks. In the judgment of the Congressional Budget Office (CBO), the conservatorship and the large ownership stake of the U.S. Treasury made Fannie Mae and Freddie Mac part of the government. The implication is that their operations should be reflected in the federal budget. We return to this issue in the next chapter. 32 As late as August 2008, Freddie and Fannie claimed that they were solvent with regulatory capital of $37 and $47 billion, respectively. However, these numbers excluded “temporary” paper losses of $34 billion at Freddie and $11 billion at Fannie. These were booked as tax-deferred assets, having the perverse effect of inflating the assets instead of reducing them....
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The special private corporation status of these GSEs meant...

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