Fannie Mae and Freddie Mac: a case study in the politics of financial reform

Abstract

Purpose

The desirability of financial reform to avoid another financial melt‐down is widely accepted, but the likelihood of reform is uncertain. The purpose of this paper is to present a case study of evolution and reform attempts at US mortgage giants Fannie Mae and Freddie Mac and provides an instructive model of the likely long‐term success of attempts to reform the financial system.

Design/methodology/approach

A model of the legislative and regulatory change process is first developed, considering the range of influences that arise. The history of reform attempts for US government sponsored mortgage giants Fannie Mae and Freddie Mac are examined in the context of this model.

Findings

The model predicts that reform will often be thwarted. US government sponsored mortgage giants Fannie Mae and Freddie Mac helped fuel the housing bubble and required a government bail‐out. Sentiment for reform was high, but what happened next was – nothing. Fannie Mae and Freddie Mac have a long history of successful lobbying, and they succeeded again. They did not need to stop legislation. They needed only to see it delayed long enough for attention to turn elsewhere. Five years after the bubble broke, their market dominance and the implied guarantees continue. Reform is not on the legislative agenda. This outcome does not bode well for financial market reform or stability.

Originality/value

An understanding of the process, influences, and likelihood of reform is important for governments, businesses, and individuals. While the picture this paper paints is not optimistic, it is important.

Citation

Islam, M., Seitz, N., Millar, J., Fisher, J. and Gilsinan, J. (2013), "Fannie Mae and Freddie Mac: a case study in the politics of financial reform", Journal of Financial Crime, Vol. 20 No. 2, pp. 148-162. https://doi.org/10.1108/13590791311322346