Exam #3 Flashcards
What is the main difference between Fannie and Freddie?
Fannie = big major retail and commercial mortgages
Freddie = smaller banks that serve local/regional communities mortgages
Who regulates Fannie and Freddie?
The U.S. Government - specifically the Federal Housing Finance Agency (FHFA)
What does GSE imply?
Operating with some sort of tie to the U.S. Government that includes all of the sorts of financial backstop in the event of a financial crisis
What benefits did Fannie and Freddie receive that may give them a competitive funding advantage?
- Do not need to pay state taxes
- Investors in Fannie and Freddie do not need to pay state taxes on the interest that accrued/is paid to them
- Fannie and Freddie bonds are effectively guaranteed by the U.S. government
- Benefit from their massive scale (center of gravity argument)
- Permitted to employ much greater leverage than “regular” banks
Why do Fannie’s and Freddie’s mortgage securitization have only one class of debtors (mortgage bonds), while private subprime mortgage securitization may have multiple classes?
Fannie and Freddie have historically securitized only prime, conforming loans that meet specific underwriting and eligibility criteria (considered low risk). The risk of underlying loans is relatively low and cash flow is predictable.
Private subprime mortgage securitization often involves pooling loans with varying credit quality and risk characteristics.
What happened to Fannie and Freddie during the financial crisis?
In 2008, the Bush Administration sees the control of Fannie and Freddie + places the government in control.
1. Extended $200B in U.S. Treasury support
2. Received outright ownership of 79.9% of both F + F
Why did the U.S. Treasury opt to take 79.9% of the equity instead of more?
A weird accounting rule. If it is over 80%, the government would need to be able to consolidate this onto its own balance sheet. They did not want to put F+F debt on their balance sheet.
Supplementary reasons:
1. Prevent moral hazards
2. Could encourage better management practices
3. Maintain some degree of market discipline by leaving private shareholders
How did the conservatorship of Fannie in Sept. 2008 affect its subordinate (unsecured) bond holders? How did it affect its preferred equity?
Subordinate bondholders were fine because they were guaranteed by the U.S. government and did pretty well under conservatorship.
Preferred equity holders were not good because they were no longer able to receive equity. Their value plunged substantially.
What does FDIC insurance protection actually entail?
Insures up to $250,000 across checking, savings, money market accounts, certificates of deposit, and cashiers checks.
What does FDIC insurance NOT cover?
Investments in stocks, bonds, mutual funds, and CRYPTO.
What were FDIC’s actions during the financial crisis?
- FDIC insurance limited to $250,000
- Granted FDIC insurance for all deposits in non-interest-bearing accounts
- Making special assessment on banks in order to recapitalize the deposit insurance fund (DIF)
- Granted newly-issued bonds of U.S. financial companies
Why are bank runs no longer obsolete?
Crypto, start-ups, and poor decision-making.
SVB: How did we get here?
Facts:
1. Over 95% of SVB’s deposits were uninsured
- SVB invested much of its customer deposits in Treasuries/gov. bonds with fixed interest rates
- JPowell raised interest rates and these bonds lost their value
- The group chat with 200+ SVB tech depositors decided to pull their money from the bank and caused a bank run that they were “shocked” by
- A lot of SVB customers are start-ups (these are the people who are getting hit pretty badly - More likely to ask for their money back)
- Significant spillover affects onto regional banks
SVB: How did we get here?
Facts:
1. Over 95% of SVB’s deposits were uninsured
- SVB invested much of its customer deposits in Treasuries/gov. bonds with fixed interest rates
- JPowell raised interest rates and these bonds lost their value
- The group chat with 200+ SVB tech depositors decided to pull their money from the bank and caused a bank run that they were “shocked” by
- A lot of SVB customers are start-ups (these are the people who are getting hit pretty badly - More likely to ask for their money back)
- Significant spillover affects onto regional banks
What risk did SVB have?
Interest Rate Risk!
Assets and Liabilities were both highly correlated with interest rate.