The bankruptcy of Fannie Mae and Freddie Mac from the Latin American experience

Abstract

As the financial position of the semi-public banks Fannie Mae and Freddie Mac have continued to deteriorate over the last months, the debate over their current viability and their future role in the United States’ financial system has intensified. While a wide range of positions have been expressed in both financial and academic circles, in the United States no attention has been given to the historical experiences of Latin American public banks during financial crises, which hold many similarities to the current dynamics behind the debate over Fannie Mae and Freddie Mac. In Latin America, such moments have provided the opportunity for the transfer of privately held financial assets of decreasing value to public banks, and also for the drastic reduction of public bank activity, thus allowing private sector actors to expand at the expense of state-owned banks. These experiences are of particular relevance to the future of Fannie Mae and Freddie Mac, as the same groups that oversaw these crises are currently managing the financial crisis in the United States. As will be agued, the same strategies used in Latin America to minimize the role of the state in the financial sector are currently being employed in the United States.