Changes

===Stiglitz and Orszag hired to calm fears 2001 - 2002===

===Stiglitz and Orszag hired to calm fears 2001 - 2002===

As worries about Fannie Mae's overexposure for securitizing nearly $1 trillion in debt grew, Raines' Fannie Mae hired Economist [[Joseph Stiglitz]], former Clinton Special Assistant for Economic Policy [[Peter Orszag]], and the Managing Director of their firm Jonathan Orszag to write a paper to calm fears. The conclusion made the fantastic claim that Fannie Mae's chance of insolvency were 1 in 500,000:

As worries about Fannie Mae's overexposure for securitizing nearly $1 trillion in debt grew, Raines' Fannie Mae hired Economist [[Joseph Stiglitz]], former Clinton Special Assistant for Economic Policy [[Peter Orszag]], and the Managing Director of their firm Jonathan Orszag to write a paper to calm fears. The conclusion made the fantastic claim that Fannie Mae's chance of insolvency were 1 in 500,000:

{{QuoteBox|...the probability of a shock as severe as embodied in the risk-based capital standard is substantially less than one in 500,000 – and may be smaller than one in three million. Given the low probability of the stress test shock occurring, and assuming that Fannie Mae and Freddie Mac hold sufficient capital to withstand that shock, the exposure of the government to the risk that the GSEs [government sponsored entities Fannie Mae and Freddie Mac] will become insolvent appears quite low. <br><br>

{{QuoteBox|...the probability of a shock as severe as embodied in the risk-based capital standard is substantially less than one in 500,000 – and may be smaller than one in three million. Given the low probability of the stress test shock occurring, and assuming that Fannie Mae and Freddie Mac hold sufficient capital to withstand that shock, the exposure of the government to the risk that the GSEs [government sponsored entities Fannie Mae and Freddie Mac] will become [[insolvent]] appears quite low. <br><br>

Given the extremely small probability of default by the GSEs, the expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and assuming that the government would bear the costs of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million. <br><br>

Given the extremely small probability of default by the GSEs, the expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and assuming that the government would bear the costs of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million. <br><br>