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Valuing Government Guarantees

Valuing Government Guarantees

Fannie and Freddie Revisited

(p.131) 6 Valuing Government Guarantees
Measuring and Managing Federal Financial Risk
Deborah LucasRobert McDonald
University of Chicago Press

This chapter considers some of the methodological issues surrounding estimating government-sponsored enterprise (GSE) subsidy values using a derivatives pricing approach and provides new estimates of the subsidy to Fannie and Freddie, taking these considerations into account. Existing estimates of the GSE subsidy value—made under the relatively stable market conditions of the last decade—vary enormously, ranging from $200 million to $182 billion. The wide range reduces the credibility of cost estimates and suggests the need to reconsider what is driving these differences. The takeover of Fannie and Freddie by the federal government and the prospect that they may remain fully federal entities for an extended time period underscore the need for improved tools to evaluate and monitor their costs and risks.

Keywords:   Government-sponsored enterprise, government guarantees, Fannie, Freddie, costs and risks, subsidy value

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