The GSE Experiment Has Failed—Congress Should End It

Oct 15, 2026

Uploaded by James

Analyzes the Federal Housing Finance Agency’s 2008 decision to place Fannie Mae and Freddie Mac into conservatorship instead of receivership. Explains how Preferred Stock Purchase Agreements (PSPAs) and Treasury support structured taxpayer protections, including senior preferred stock, warrants, liquidation preference priority, and quarterly dividend obligations. Shows how repeated PSPA amendments effectively forced additional taxpayer bailouts over 2008–2012, while federal dominance reduced private competition without raising homeownership.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages7

Reading Time18 min

AccessFree to download

Overview of PSPAs and Conservatorship

PSPA structure and taxpayer protections

Bailouts and PSPA amendments (2008–2012)

| | | --- | | | | BRIEFING | | P A P E R | | OctOber 14 , 2 02 4 Number 1 8 0 | The GSE Experiment Has Failed—Congress Should End It By NorBert Michel I n 2008, America’s largest government-sponsored enterprises (GSEs)—the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—recorded combined net losses of $109 billion. This figure surpassed the GSEs’ cumulative net income over the prior 40 years, and the federal government placed both GSEsin conservatorship on September 6, 2008.1 Although Congress clearly intended such conservatorships tobe temporary, unlike the receivership process that it designed for closing an insolvent GSE, both GSEs remain insolvent and in conservatorship.2 Throughout the 16-year conservatorship, many people have proposed plans to rework the Preferred Stock Purchase Agreements (PSPAs) that specify the terms of the support the US Treasury provided to the GSEs.3 Although renegotiating the PSPAs maybe necessary to end the GSEs’conservatorships, any new deal should be structured to facilitate receivership and liquidation, accelerating an end to America’s failed GSE experiment. The federal government’s dominance in the housing finance market—both before and throughout the GSE conservatorships—has stifled private competition and worsened Americans’ financial condition, but it has done virtually nothing to increase the homeownership rate. It is time to wind down the affairs of the GSEs through receivership, a process that the federal government should have undertaken in 2008. OVERVIEW OF PS PAS AND CONSERVATORS HIP On September 6, 2008, the Federal Housing Finance Agency (FHFA) placed the GSEs under conservatorship rather than receivership. In accordance with its broad conservator powers, the FHFA secured two $100 billion credit lines (one for each company) from the Treasury to bail the GSEs out of trouble. As part of this PSPA, each GSE issued a million shares of a new class of senior preferred stock to the Treasury (with an initial valuation of $1,000 per share) in exchange for its line of credit. NORBERT J. MICHEL is a Cato Institute vice president and director of Cato’s Center for Monetary and Financial Alternatives. The PSPAs specified various other terms and conditions of the bailout, and the initial agreement contained several taxpayer protections, including the following four items.4 1. Absent Treasury approval, dividend payments on classes of stock other than the specially created senior preferred stock were suspended until the GSEs repurchase the preferred stock from the Treasury. 2. Treasury holds the right (through warrants) to purchase up to 79.9 percent of the GSEs’ common stock. The warrants do not require the Treasury to make this purchase. 3. A “liquidation preference” specifies that any funds derived from either new capital infusions or the liquidation of assets must first be used to compensate taxpayers for the bailout, and the GSEs cannot emerge from conservatorship without paying this liquidation preference in full. The liquidation preference was initially set at $1,000 per share ($1 billion for each GSE’s senior preferred stock) . It was also designed to increase as the GSEs drew on their lines of credit and if the GSEs did not pay (to the Treasury) the periodic commitment fees due on the senior preferred stock. In the event the GSEs are dissolved, the liquidation preference takes priority over liabilities due to other investors or creditors. 4. The GSEs were required to pay quarterly dividends on the Treasury’s senior preferred stock. The initial PSPAsset these dividends equal to 10 percent (annualized) of the value of the liquidation preference if paid in cash. Dividend payments were also set to increase if the Treasury extended additional credit. Notably, dividend payments on the senior preferred stock do not diminish the value of the liquidation preference—the dividend payments function as int

FAQs

Why does the paper argue that Congress should end the GSE conservatorships?

It contends that, despite the intent for conservatorships to be temporary, both GSEs remained insolvent for years, and the PSPA framework kept extending taxpayer support without restoring solvency.

What roles do the PSPAs play in the federal support arrangement?

The PSPAs specify the terms of Treasury credit lines, senior preferred stock issuance, warrant-based rights over common equity, liquidation preference priority, and required dividend payments.

How did PSPA amendments affect taxpayer exposure between 2008 and 2012?

Rather than ending the crisis, the FHFA and Treasury amended the PSPAs multiple times, effectively triggering additional bailouts as commitments expanded and terms were reshaped.

Oct 15, 2026

Uploaded by James