Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are private corporations that were established by Congress and are referred to as government sponsored enterprises or GSEs. They are the largest “packagers” of individual mortgages into mortgage backed securities (MBS) which they guarantee against loss.
We will be addressing the following threats to your financial institutions stability. Counterparty risk. Internal and external vulnerability and threats. Stemming the tide of losses from overly aggressive practices in lending continues to retard the marketplace and has yet to reach equilibrium. The use of macro measures is of critical importance in returning the company to ...view middle of the document...
Predictive or ex ante measures may be able to provide early warnings of a future crisis, for example, by identifying specific vulnerabilities in the structure of the system that may demand a preventive policy, or by identifying potential shocks to the financial system, such as those arising from asset price misalignments;
Contemporaneous measures can alert policymakers on a real-time basis to the level of risks and vulnerabilities, for example, by identifying individual institutions that pose by outsized threats to financial stability, or by helping policymakers understand events as a crisis unfolds; and, Ex post measures support forensic analysis of crises after they occur and can help supervisors and senior management in the orderly liquidation of financial institutions that have failed.
Measures of Interconnectedness, Using Relationship Data. These measures take a network approach to the financial system. To date, these measures have had to make do with traditional data sources, inferring the underlying connections by observing co-movements in market prices. The data requirements for a fully detailed counterparty network model are potentially extensive. A key policy development related to models of interconnectedness is the requirement in the Dodd-Frank Act for large financial institutions to create resolution plans, also known as living wills. These plans must include details on firms’ ownership structures, assets, liabilities, contractual obligations, cross-guarantees, collateral pledges, major counterparties, and significant credit exposures. An example of what is possible going forward appears in Chart 3.1.1, which depicts the connections of the largest money market funds to the institutional issuers whose securities they hold. These data only became available in 2010 through the SEC’s new Form N-MFP. They can illuminate systemic fragility by revealing which issuers might face funding liquidity issues if a given money market fund experienced a run, or which money market funds would be harmed if an issuer were to default.
Myopia. Even if calculated accurately, CVA captures, at best, the immediate cost of a counterparty’s default. This is a myopic view in the sense that it does not capture the potential follow-on effects of such a default. One...