The paper concludes that the probability of default by the GSEs is extremely small. Given this, the expected monetary costs of exposure to GSE insolvency are relatively small -- even given very large levels of outstanding GSE debt and even assuming that the government would bear the cost 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 less than $2 million. To be sure, it is difficult to analyze extremely low-probability events, such as the one embodied in the stress test. Even if the analysis is off by an order of magnitude, however, the expected cost to the government is still very modest.
In his recent Podcast interview with Russ Roberts, Charles Calomiris reveals something interesting that has been almost loss down the memory hole. Almost. Calomiris points out that Joe Stiglitz, Jonathan Orszag, and Peter Orszag were hired by Fannie Mae to write a paper in 2002 defending the claim that the odds of Fannie Mae ever getting into financial trouble were extremely low. The quote above is the abstract of their piece. Fannie Mae later pulled it off its website. Stiglitz still lists it on his CV (page 47 at the bottom) but I have been unable to find the whole paper on the web. I can find a link, but the link doesn't work. Can anyone provide the whole paper?
The whole title is, "Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard," by Joseph E. Stiglitz, Jonathan M. Orszag and Peter R. Orszag. It's listed in Fannie Mae Papers, Volume 1, Issue 2, March 2002.
I know it's out there because commenter Greg quotes from the paper.
Peter Orszag, of course, is President Obama's Director of the Office of Management and Budget.