Option Pricing, Zero Lower Bound, and COVID-19

This paper provides a quantitative assessment of equity options priced at the Zero Lower Bound, i.e., when interest rates are set essentially to zero. We obtain closed form formulas for American options when the Zero Lower Bound policy holds. We perform numerical implementation of American put options written on the stock Federal National Mortgage Association (FNMA) and of related bounds for the optimal exercise. The results show similarities with the corresponding European options priced at the Zero Lower Bound during the COVID-19 crisis.

A Return to Securitization

This chapter discusses the distributional politics of mortgage markets and securitization in the postwar era and explains their transformation in the 1960s as the Federal National Mortgage Association (FNMA/Fannie Mae) was “spun off” from the government and authorized to finance itself by issuing a new kind of government-guaranteed mortgage-backed security. In the second half of the decade, a series of crises marked the end of one era and the beginning of a long transition into a new one marked by scarcity, neoliberalism, and financialization. The end of postwar affluence created a distributional struggle over which social groups would pay for what, and that process played out through the highly contentious and veto-ridden world of budget politics. Housing credit was doubly implicated in these fights, first because it was hit hard and early in market corrections, and second because its credit programs could be used for off-budget accounting. For all that the new approach to securitization reflected a changing relationship between the state and the market, the modern mortgage-backed security continued to reflect the institutional logic of the credit programs: the use of state-promoted financial development and risk redistribution as an alternative to more direct forms of wealth redistribution.

Book Reviews

Sumit Agarwal of National University of Singapore reviews “Last Resort: The Financial Crisis and the Future of Bailouts,” by Eric A. Posner. The Econlit abstract of this book begins: “Argues that, in responding to the financial crisis that began in 2007, the US government violated the law and was able to gain control over AIG, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) early in the critical stage of the crisis—but it did so in the public interest.”

There Is No Accounting For Fannie Mae

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The Federal National Mortgage Association (FNMA, Fannie Mae), was created in 1938, as a part of the New Deal.<span style="mso-spacerun: yes;">&nbsp; </span>In 2003, regulators discovered serious accounting problems that may cost Fannie Mae several billion dollars in losses. In 2003, the Office of Federal Housing Enterprises Oversight (OFHEO) investigated Fannie Mae and found a culture of corruption, arrogance, and pervasive accounting violations in the company.<span style="mso-spacerun: yes;">&nbsp;&nbsp; </span>Executives at Fannie Mae cooked books to pocket an extra twenty-seven million dollars in bonuses.<span style="mso-spacerun: yes;">&nbsp; </span>This paper presents the accounting improprieties at Fannie Mae and the consequences that followed its investigation.</span></span></p>