The Debt Ceiling and Conservatorship of Fannie Mae and Freddie Mac

Includes: FMCC, FNMA
by: Richard Suttmeier

Quotes from the CRS Report for Congress, Order Code RS22950 dated September 15, 2008: (I could not find a publicly available link to RS22950, but I have a PDF version if anyone is interested.)

On September 7, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that play a critical role in the US home mortgage market, in Conservatorship. As conservator, the FHFA has full powers to control the assets and operations of the firms. Dividends to common and preferred shareholders are suspended, but the US Treasury has put in place a set of financing agreements to ensure that the GSEs continue to meet their obligations to holders of bonds that they issued or guaranteed. This means that the US taxpayer now stands behind about $5 trillion of GSE debt.

Why is this $5 trillion debt guarantee not subject to the US Debt Ceiling?

The CRS Report RS22950 stated:

GSE status has enabled Fannie and Freddie to continue to fund their operations by selling debt securities, because the market has long believed that Fannie and Freddie debt was “implicitly” guaranteed by the government, even though by law GSE obligations are not backed by the full faith and credit of the United States.

I was a US Treasury and Agency Trader (including Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC) debt) for 25 years beginning in 1972, including stints at several primary dealers. I never represented Fannie and Freddie as having the backing of the full faith and credit of the US government.

Even today, this is the statement on the Fannie Mae website:

Fannie Mae debt securities, together with interest thereon, are not guaranteed by the United States and do not constitute a debt or obligation of the United States or of any agency or instrumentality thereof other than Fannie Mae.

The CRS Report RS22950 stated:

Under Conservatorship GSE bondholders are recipients of tax payer funds transferred from Treasury to the GSEs under the financing agreement.

Does this not make Fannie and Freddie debt subject to the US Debt Ceiling? If not, the GSE debt must be off the government’s balance sheet, which implies that the debt ceiling is bogus. According to, the US Treasury and hence tax payers have transferred $162.4 billion to Fannie Mae and Freddie Mac.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.