Buckley fannie maes vice president for communications

Info icon This preview shows pages 22–24. Sign up to view the full content.

View Full Document Right Arrow Icon
Buckley, Fannie Mae’s vice president for communications, bluntly told the Wall Street Journal, ‘We’re not casual about managing our political risk’.” 5 This does not mean that some members of Congress and the leadership at the GSEs’ regulator didn’t try to rein in the GSEs; but the inadequate numbers of the former and the inadequate regulatory powers of the latter hindered these efforts – a condition that the GSEs lobbied strenuously to perpetuate. As just one illustration: In response to a 2004 Congressional bill that was aimed at enhanced regulation of Fannie and Freddie, with remarkable bravado, Fannie ran a television advertisement the day before the Senate Banking Committee was to work on the bill. 6 Fannie Mae -- created and supported by the government -- was now going after the government head-on. The monster was destroying its Frankenstein creator. Needless to say, the bill died. The advertisement shows a concerned Hispanic man. He says “Uh-oh,” and the wife responds, “What?” “It looks like Congress is talking about new regulations for Fannie Mae,” the man states. “Will that keep us from getting that lower mortgage rate?” the women replies. “Some economists say rates may go up” he says. “But that could mean we won’t be able to afford the new house,” says the woman. “I know,” the husband concludes. While Nader’s article makes clear how difficult it was for Washington DC to put constraints on Fannie Mae and Freddie Mac, the question remains: How did they grow so big? 1.4 Drowning in Debt With the deregulation of the mortgage finance market, the decade of the 1980s was a period of substantial growth for Fannie and Freddie. At the end of the decade, Fannie and Freddie were fundamentally entrenched as parallel GSEs, with similar structures, privileges, responsibilities, and limitations. The last major legislation to impact the GSEs until the financial crisis of 2007-2009 was the Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA) of 1992. It produced a number of important rules, one in particular related to capital requirements. In particular, a risk-based capital regulatory regime was specified for Fannie and Freddie and their two main functions: (i) securitizing and guaranteeing the credit risk of MBS, and (ii) investing in MBS or other similar portfolios of mortgages. With respect to (i), the capital buffer that the GSEs were required to hold against these guarantees was 0.45% (i.e., 45 cents per $100
Image of page 22

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
21 of guaranteed mortgages), which implied that the Congress believed that residential mortgages were quite safe instruments to guarantee against credit risk – or that the Congress meant to subsidize these guarantees and was (if push came to shove) prepared to cover any losses. With respect to (ii), the GSEs were to hold 2.50% capital against their balance sheet assets (of which mortgages are by far the largest category). Thus, for every $100 in mortgages held, they could (in principle) fund those mortgages with $97.50 in debt and only $2.50 in equity.
Image of page 23
Image of page 24
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern