Abstract
This paper examines the contribution of the current sub debt programs of Fannie Mae and Freddie Mac to market discipline of the Enterprises. The paper also examines the potential for alternative forms of sub debt to enhance market discipline of the Enterprises. Previous research on market discipline of Fannie Mae and Freddie Mac has assessed how the market responds to new information about the Enterprises. Specifically, that research focused on how Enterprise share prices and senior debt yield spreads (spreads between Enterprise senior debt and Treasury issues of comparable maturities) responded to new information. This paper extends that research by examining how spreads between Fannie Mae and Freddie Mac sub and senior debt have responded to new information.
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