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/* Stiglitz and Orzag hired to calm fears */
===Stiglitz and Orzag hired to calm fears===
As worries about Fannie Mae's overexposure for securitizing nearly $1 trillion in debt grew, Raines's Fannie Mae hired Economist [[Joseph Stiglitz]], Clinton's former Special Assistant to the President for Economic Policy [[Peter Orzag]], and the Managing Director of their firm Jonathan Orzag 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 in500,000 – 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>
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 in500,000, 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>
...In the absence of Fannie Mae and Freddie Mac, mortgage risk would likely be held by large banks and other types of financialinstitutions, which themselves benefit from the perception that they are “too big to fail.” Fannie Mae and Freddie Mac are among the largest financial institutions in the country. Even in the absence of a GSE charter it is likely that they would continue to benefit from their size, since the government has intervened on behalf of other largeinstitutions in the past....<ref>[ http://www.pierrelemieux.org/stiglitzrisk.pdf. Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard,] by Joseph E. Stiglitz, Jonathan M. Orszag and Peter R. Orszag. Fannie Mae Papers, Volume 1, Issue 2, March 2002. </ref>}}
Stiglitz was granted the [[Nobel Prize]] in [[Economics]] for 2001. When Fannie Mae went was declared insolvent in 2008, throwing the planet into a deep economic upheaval for the better part of the next decade, Fannie Mae pulled the paper off its website.<ref>[http://econlog.econlib.org/archives/2009/11/stiglitz_and_or.htmlbStiglitz and Orszags on Fannie Mae,] David Henderson, November 9, 2009. econlog.econlib.org </ref> And after Peter Orzag was was proven disastrously in error with his prediction of 1 in a half million chance of a Fannie Mae meltdown, President [[Barack Obama]] appointed him to manage the government's finances as Director of the Office of Management and Budget.
