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Freddie Mac to fail. There may have been absent management in the two agencies. As they were not banks this is not the place to determine that. With their original remit of providing affordable financing of housing, their exclusive reliance on United States housing, their listing on the stock exchange requiring rewarding of shareholders and their phenomenal growth, perhaps these unique organisations were so complex that they were not possible to manage. For the second half of 2007 the two agencies’ combined losses were close to $9 billion from credit losses on mortgages and reduced valuation on their investments. For the first half of 2008 losses were over $14 billion. On Sunday, 7 September 2008, the United States government assumed majority ownership and control of Fannie Mae and Freddie Mac that together owned or guaranteed over $5 trillion of the United States mortgage debt (Pozen and Beresford 2010). This was done to stabilise the housing market. The two organisations continually financed their purchases of mortgages in the financial markets. Had the government not stepped in this, financing might not have been possible and the secondary market for mortgages would have dried up. This could have the most serious consequences for the prime mortgage market and house prices in the United States. In addition credit issues on mortgage-backed securities issued by the two agencies, which were backed by conforming and not subprime mortgages, would have made the crisis worse, possibly much worse. An additional global aspect was the ownership of the two agencies’ mortgage-backed securities by foreign investors led by China with over $500 billion. Not explicitly guaranteeing this debt could raise questions about the financial standing of the United States. The government ultimately injected $188 billion into Fannie Mae and Freddie Mac (Frame et al. 2005).
References Brewster, Deborah, and Anuj Gangahar. 2008. Financial Times. 17 March 2008. https://www.ft.com/content/da8db5d2-f469-11dc-aaad-0000779fd2ac Calomiris, Charles W., and Gary Gorton. 1991. In The Origins of Banking Panics: Models, Facts, and Bank Regulation in Financial Markets and Financial Crises, ed. R. Glenn Hubbard, 109–174. National Bureau of Economics. University of Chicago Press. Demyanyk, Yuliya S., and Otto van Hemert. 2008. Understanding the Subprime Mortgage Crisis. SSRN: https://ssrn.com/abstract=1020396 or https://doi. org/10.2139/ssrn.1020396
