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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

, in May; between  and , it had typically been about ,. In Au-
gust, they both reported more losses for the second quarter.
Even after both Fannie and Freddie became public companies owned by share-
holders, they had continued to possess an asset that is hard to quantify: the implicit
full faith and credit of the U.S. government. The government worried that it could
not let the . trillion GSEs fail, because they were the only source of liquidity in the
mortgage market and because their failure would cause losses to owners of their debt
and their guaranteed mortgage securities. Uncle Sam had rescued GSEs before. It
bailed out Fannie when double-digit inflation wrecked its balance sheet in the early
s, and it came through in the mid-s for another GSE in duress, the Farm
Credit System. In the mid-s, even a GSE-type organization, the Financing Cor-
poration, was given a helping hand.
As the market grappled with the fundamental question of whether Fannie and
Freddie would be backed by the government, the yield on the GSEs’ long-term bonds
rose. The difference between the rate that the GSEs paid on their debt and rates on
Treasuries—a premium that reflects investors’ assessment of risk—widened in 
to one-half a percentage point. That was low compared with the same figure for other
publicly traded companies, but high for the ultra-safe GSEs. By June , the spread
had risen  over the  level; by September , just before regulators parachuted
in, the spread had nearly doubled from its  level to just under , making it
more difficult and costly for the GSEs to fund their operations. On the other hand,
the prices of Fannie Mae mortgage–backed securities actually increased slightly over
this time period, while the prices of private-label mortgage–backed securities dra-
matically declined. For example, the price of the FNCI index—an index of Fannie
mortgage–backed securities with an average coupon of —increased from  in
January  to  on September , , two days prior to the conservatorship. As
another example, the price of the FNCI index—Fannie securities with an average
coupon of —increased from  to  during the same time period.
In July and August , Fannie suffered a liquidity squeeze, because it was un-
able to borrow against its own securities to raise sufficient cash in the repo market.
Its stock price dove to less than  a share. Fannie asked the Fed for help. A senior

adviser in the Federal Reserve Board’s Division of Banking Supervision and Regula-
tion gave the FCIC a bleak account of the situation at the two GSEs and noted that
“liquidity was just becoming so essential, so the Federal Reserve agreed to help pro-
vide it.” 
On July , the Federal Reserve Board in Washington authorized the New York
Fed to extend emergency loans to the GSEs “should such lending prove necessary . . .
to promote the availability of home mortgage credit during a period of stress in fi-

nancial markets.” Fannie and Freddie would never tap the Fed for that funding. 
Also on July , Treasury laid out a three-part legislative plan to strengthen the
GSEs by temporarily increasing their lines of credit with the Treasury, authorizing
Treasury to inject capital into the GSEs, and replacing OFHEO with the new Federal
Housing Finance Agency (FHFA), with the power to place the GSEs into receiver-
ship. Paulson told the Senate that regulators needed “a bazooka” at their disposal.