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Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance
Why America's public-private mortgage giants threaten the world economy―and what to do about it
The financial collapse of Fannie Mae and Freddie Mac in 2008 led to one of the most sweeping government interventions in private financial markets in history. The bailout has already cost American taxpayers close to $150 billion, and substantially more will be needed. The U.S. economy--and by extension, the global financial system--has a lot riding on Fannie and Freddie. They cannot fail, yet that is precisely what these mortgage giants are guaranteed to do. How can we limit the damage to our economy, and avoid making the same mistakes in the future?
Guaranteed to Fail explains how poorly designed government guarantees for Fannie Mae and Freddie Mac led to the debacle of mortgage finance in the United States, weighs different reform proposals, and provides sensible, practical recommendations. Despite repeated calls for tougher action, Washington has expanded the scope of its guarantees to Fannie and Freddie, fueling more and more housing and mortgages all across the economy--and putting all of us at risk. This book unravels the dizzyingly immense, highly interconnected businesses of Fannie and Freddie. It proposes a unique model of reform that emphasizes public-private partnership, one that can serve as a blueprint for better organizing and managing government-sponsored enterprises like Fannie Mae and Freddie Mac. In doing so, Guaranteed to Fail strikes a cautionary note about excessive government intervention in markets.
The financial collapse of Fannie Mae and Freddie Mac in 2008 led to one of the most sweeping government interventions in private financial markets in history. The bailout has already cost American taxpayers close to $150 billion, and substantially more will be needed. The U.S. economy--and by extension, the global financial system--has a lot riding on Fannie and Freddie. They cannot fail, yet that is precisely what these mortgage giants are guaranteed to do. How can we limit the damage to our economy, and avoid making the same mistakes in the future?
Guaranteed to Fail explains how poorly designed government guarantees for Fannie Mae and Freddie Mac led to the debacle of mortgage finance in the United States, weighs different reform proposals, and provides sensible, practical recommendations. Despite repeated calls for tougher action, Washington has expanded the scope of its guarantees to Fannie and Freddie, fueling more and more housing and mortgages all across the economy--and putting all of us at risk. This book unravels the dizzyingly immense, highly interconnected businesses of Fannie and Freddie. It proposes a unique model of reform that emphasizes public-private partnership, one that can serve as a blueprint for better organizing and managing government-sponsored enterprises like Fannie Mae and Freddie Mac. In doing so, Guaranteed to Fail strikes a cautionary note about excessive government intervention in markets.
232 pages, Hardcover
First published January 1, 2011
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Displaying 1 - 8 of 8 reviews
February 26, 2020
5 stars BUT: this is for readers who come to the book with a good understanding of the 2008-9 crisis and it is dense with economic terms and charts.
November 6, 2025
This is an interesting book that takes you through the history of these mortgage entities and how their implicit government support without proper oversight led to a slow-walking disaster over time. The author's libertarian bent is clear throughout and suggests the GSEs should be privatized entirely. This now seems to be something on the table. I don't know if this is necessarily the most stable path, but the author has made a compelling argument its current protected path led to unnecessarily risky behavior.
March 14, 2018
Positive:
+Gives a clear understanding of Fannie & Freddie's business model.
+Straight-forward language, no buzzwords are left unexplained.
Negative:
-It's quite boring to read a whole book on someone's opinion - that's about half the book. That said, I agree to much of what is said.
-Arguments are made based on cocksure predictions and often to counter straw-man arguments.
-At times quite unclear: "the money that has been thrown at the banks" In what form, donations or what? Furthermore, they were provided with "commitments of $100 billion from the Treasury" What kind of "commitment"?
-Very idealistic reasoning, often ignoring the reality of politics.
-No original research but mostly relying on publicly available information.
This book is OK if you want to know more about the GSEs, but I much preferred reading The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall.
+Gives a clear understanding of Fannie & Freddie's business model.
+Straight-forward language, no buzzwords are left unexplained.
Negative:
-It's quite boring to read a whole book on someone's opinion - that's about half the book. That said, I agree to much of what is said.
-Arguments are made based on cocksure predictions and often to counter straw-man arguments.
-At times quite unclear: "the money that has been thrown at the banks" In what form, donations or what? Furthermore, they were provided with "commitments of $100 billion from the Treasury" What kind of "commitment"?
-Very idealistic reasoning, often ignoring the reality of politics.
-No original research but mostly relying on publicly available information.
This book is OK if you want to know more about the GSEs, but I much preferred reading The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall.
October 6, 2011
Acharya, Richardson, Van Nieuwerburgh, and White are professors at NYU's Stern School of Business. Individually, they are experts in the field of economics. Collectively, they are authors of the finest book on the collapse of the American mortgage market. Acharya et al. take aim at Fannie Mae and Freddie Mac as they describe the series of events that led to their downfall. These events were the result of decades of policy abuses, greed, and mismanagement. As a result, American subprime mortgage defaults ended up crashing financial markets throughout the world.
Fannie May and Freddie Mac (Government Sponsored Enterprises - GSEs) were originally government institutions. The Johnson administration wanted to clear them from the US balance sheets. Therefore, he opted to turn them into publicly traded companies in all ways but one. The GSE's were to retain the full financial backing of US government. This unique market position destroyed all prospects of a level playing field in the housing market. For example, investors didn't have to worry about risk because of the government backstop. Furthermore, it became impossible for other financial institutions to directly compete against Fannie and Freddie. Instead, they focused on buying securities from the GSEs and pursuing riskier mortgages outside of Fannie and Freddie's scope.
Over time, Fannie and Freddie had become "Frankenstein's monster." They were making money "hand over fist" for their executives and investors, while voraciously taking on risk. It was during the 1990s that the cracks began to show. The US government wanted GSEs to expand the housing market beyond their normal safe risks (conforming mortgages). As a result, they began to take on subprime (nonconforming) mortgages that further bloated their balance sheets. In turn, this forced other private companies to expand their markets to keep up. Finally, everyone was invested in everyone else along the way as a result of lending, derivatives, etc. As a result, the entire financial market was highly leveraged and relying on the US government as a backstop. When the bubble finally burst, we were left with the international market meltdown of 2007/2008.
Today, the GSEs are under government conservatorship. Acharya et al. provide various recommendations for where to go from here. Other industrialized countries have grown their housing markets with much less government intervention. As a result, the authors are proposing a hybrid solution of private and government interaction. The end goal is for the free markets to control the bulk of mortgages. The government would then transition Fannie Mae and Freddie Mac into "boring" public utilities with the sole purpose of co-insuring credit risk of safe (conforming) mortgages. This tandem approach would prevent a government sponsored company from risking away the general public's tax dollars. Acharya et al. have done a brilliant job of tracing the how GSEs distort a free market and the need for the government to embark on an exit strategy.
Highly recommended.
Fannie May and Freddie Mac (Government Sponsored Enterprises - GSEs) were originally government institutions. The Johnson administration wanted to clear them from the US balance sheets. Therefore, he opted to turn them into publicly traded companies in all ways but one. The GSE's were to retain the full financial backing of US government. This unique market position destroyed all prospects of a level playing field in the housing market. For example, investors didn't have to worry about risk because of the government backstop. Furthermore, it became impossible for other financial institutions to directly compete against Fannie and Freddie. Instead, they focused on buying securities from the GSEs and pursuing riskier mortgages outside of Fannie and Freddie's scope.
Over time, Fannie and Freddie had become "Frankenstein's monster." They were making money "hand over fist" for their executives and investors, while voraciously taking on risk. It was during the 1990s that the cracks began to show. The US government wanted GSEs to expand the housing market beyond their normal safe risks (conforming mortgages). As a result, they began to take on subprime (nonconforming) mortgages that further bloated their balance sheets. In turn, this forced other private companies to expand their markets to keep up. Finally, everyone was invested in everyone else along the way as a result of lending, derivatives, etc. As a result, the entire financial market was highly leveraged and relying on the US government as a backstop. When the bubble finally burst, we were left with the international market meltdown of 2007/2008.
Today, the GSEs are under government conservatorship. Acharya et al. provide various recommendations for where to go from here. Other industrialized countries have grown their housing markets with much less government intervention. As a result, the authors are proposing a hybrid solution of private and government interaction. The end goal is for the free markets to control the bulk of mortgages. The government would then transition Fannie Mae and Freddie Mac into "boring" public utilities with the sole purpose of co-insuring credit risk of safe (conforming) mortgages. This tandem approach would prevent a government sponsored company from risking away the general public's tax dollars. Acharya et al. have done a brilliant job of tracing the how GSEs distort a free market and the need for the government to embark on an exit strategy.
Highly recommended.
July 21, 2013
"No firm could compete with Fannie and Freddie under these circumstances: they paid less taxes, could borrow at cheaper rates, and were lightly regulated in that they faced low capital requirements for holding similar risks compared to private-sector counterparts." (21-2)
"In the end, the GSEs had inadequate capital for the risks that they were taking. But virtually all critics got the immediate source of the problem wrong. What caused the financial downfall of the GSEs was not the interest rate risk embedded in their portfolios. Instead the immediate source of the problem was the credit risk that stemmed from the poor quality of mortgages and investments that they took on and guaranteed in the middle of the decade." (98)
"Careful research has found that all of the incentives for more house has lead to a housing stock that is 30% (!) larger than would be the case if all of the incentives were absent, and that U.S. GDP is 10% smaller than it could be. The United States simply has too much house!" (168-9)
"In the end, the GSEs had inadequate capital for the risks that they were taking. But virtually all critics got the immediate source of the problem wrong. What caused the financial downfall of the GSEs was not the interest rate risk embedded in their portfolios. Instead the immediate source of the problem was the credit risk that stemmed from the poor quality of mortgages and investments that they took on and guaranteed in the middle of the decade." (98)
"Careful research has found that all of the incentives for more house has lead to a housing stock that is 30% (!) larger than would be the case if all of the incentives were absent, and that U.S. GDP is 10% smaller than it could be. The United States simply has too much house!" (168-9)
April 8, 2014
I had been confused for the longest time what on earth Fannie Mae, Freddie Mac, Ginnie Mae, and the other weird names were! The continuation of that title: the Debacle of Mortgage Finance essentially answers my question. It's something these experts in applied financial economics explained to me.
Pretty much I gathered if you don't have to worry about it, then don't, just like my parents told me. I found it interesting, still, to get an idea of why people get so upset over an idea.
Pretty much I gathered if you don't have to worry about it, then don't, just like my parents told me. I found it interesting, still, to get an idea of why people get so upset over an idea.
May 16, 2015
A great look into the subprime mortgage crisis. The authors do a great job of explaining the house of cards that was the MBS market and why the whole system went to hell in a hand-basket. They focus particularly on the large GSE's (Fannie and Freddy) and the role they played in distorting the market (because of their governmental subsidies and implicit government backing) and their problematic dual role of both guaranteeing and investing in MBS's
November 14, 2011
This book gets a 4 not because it's a good read -- it's dry as hell -- but because it's very, very informative about the details of Fannie and Freddie Mac. Some very good advice at the end, too.
Displaying 1 - 8 of 8 reviews