US Household Debt, Freddie Mac and Fannie Mae

The case studies we have followed in the preceding seven chapters have provided plenty of evidence that companies fail for not one, but several reasons. This evidence has made the point that the most frequent, and most basic, reason is mismanagement. In competition for No. 1 position is doubtful assets. Poor management is instrumental in damaging an institution’s assets because of loans commitments made with non-creditworthy counterparties,overexposure assumed with derivative financial instruments, andother acts which are a combination of blurred objectives, gambling, overleveraging, low technology, and lack of risk control. The main case study in this chapter concerns the Federal Home Mortgage Loan Corporation, better known as ‘Freddie Mac’. It was established by the US Federal Government in 1970 (more on this in sections 3 and 4). In the 1990s, like so many other institutions which were supposed to be prudent, Freddie Mac overleveraged itself — and in the first years of the new century it went overboard with derivatives.