Fannie Mae and Freddie Mac: a case study in the politics of financial reform
| Date | 03 May 2013 |
| Published date | 03 May 2013 |
| DOI | https://doi.org/10.1108/13590791311322346 |
| Pages | 148-162 |
| Author | Muhammad Islam,Neil Seitz,James Millar,James Fisher,James Gilsinan |
| Subject Matter | Accounting & finance |
Fannie Mae and Freddie Mac:
a case study in the politics of
financial reform
Muhammad Islam
Department of Economics, John Cook School of Business,
Saint Louis University, St Louis, Missouri, USA
Neil Seitz
Department of Finance, John Cook School of Business,
Saint Louis University, St Louis, Missouri, USA
James Millar
Department of Finance, University of Arkansas, Fayetteville, Arkansas, USA
James Fisher
Department of Marketing, John Cook School of Business,
Saint Louis University, St Louis, Missouri, USA, and
James Gilsinan
Department of Public Policy Studies, Saint Louis University,
St Louis, Missouri, USA
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 modelpredicts that reform will often be thwarted. US government sponsored mortgage
giants Fannie Mae and Freddie Mac helped fuel the housing bubble and required a governmentbail-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 thebubble broke, their market dominance and the implied guarantees continue. Reformis noton 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.
Keywords Finance, FannieMae, Freddie Mac, Financial reform, Financialcrisis, Mortgage companies
Paper type Conceptual paper
No organizations were closer to ground zero of the real estate bubble and sub-prime
mortgage melt-down than the Federal National Mortgage Association (Fannie Mae) and
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
Journal of Financial Crime
Vol. 20 No. 2, 2013
pp. 148-162
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791311322346
JFC
20,2
148
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