Fannie, Freddie Deflected Risk Warnings

The companies fought back.

"We think that the statements evidence a contempt for the nation's housing and mortgage markets," Freddie Mac spokeswoman Sharon J. McHale said at the time.

Even after Freddie Mac was shown to have manipulated earnings, Congress remained deadlocked over legislation to create a stronger regulator. Opposing one such bill in 2004, Sen. Charles E. Schumer (D-N.Y.) argued that a hostile regulator could use the proposed powers to choke the companies.

When a federal regulator accused Fannie Mae of cooking its books to increase bonuses, lawmakers lined up to denounce the regulator. Rep. William L. Clay Jr. (D-Mo.) said a House panel had no business holding a hearing on the matter -- "unless this is truly a witch hunt." Fannie Mae was later found to have overstated profits by $6.3 billion.

Former representative Richard H. Baker (R-La.), who chaired a subcommittee that oversaw the companies, struggled for years to rein them in and tried to show they were being managed for the enrichment of their executives. When Baker obtained data on Fannie Mae pay, a lawyer for the company threatened him with personal liability if he made it public, Baker recounted last week.

Critics of the two firms included former Reagan administration official Peter Wallison, who crusaded against them at the American Enterprise Institute, and a coalition of financial companies whose interests often conflicted with those of Fannie Mae and Freddie Mac. The Bush administration pushed a similar agenda.

"The simple truth is that there is no need for our financial markets to be exposed to this risk," Emil W. Henry, Jr., an assistant Treasury secretary, said in 2006.

On the other side, a top lobbyist for Freddie Mac held more than 75 fundraisers for members of the House Financial Services Committee in an 18-month period several years ago, raising nearly $3 million, according to records brought to light in a federal investigation. The lobbyist's fundraising dinners typically featured the committee's Republican chairman at the time, Michael G. Oxley of Ohio.

Those and other activities led to a record $3.8 million fine against Freddie Mac in 2006 for allegedly violating federal election law.

In an internal memo in 2004, Fannie Mae executive Daniel H. Mudd affirmed what the company's critics had long contended: In the political arena, "we always won" and "we took no prisoners."

"We used to, by virtue of our peculiarity, be able to write, or have written, rules that worked for us," wrote Mudd, now the company's chief executive.

As the housing market boomed in recent years, Fannie and Freddie, like many lenders, took on riskier loans. Freddie Mac executives have said they loosened lending standards to avoid losing market share.

Since the boom turned to bust, the government in some ways has given the companies freedom to dig themselves into a bigger hole. As other sources of funding for mortgages have dried up, the government has become more dependent than ever on Fannie Mae and Freddie Mac to keep the market functioning, and it has reduced their capital requirements.

Citing accounting and other issues, some analysts said the government has allowed Fannie Mae and Freddie Mac to paper over the extent of their problems, contributing to the market's loss of faith in them last week.

Freddie Mac spokeswoman McHale denied that allegation, a Fannie Mae spokesman declined to address it, and a spokeswoman for the Office of Federal Housing Enterprise Oversight, the companies' main regulator, did not respond to a request for comment.

"While Administration officials continue to claim the companies are adequately capitalized, the markets do not believe this," analyst Joshua Rosner of Graham Fisher & Co. wrote in a Friday report.

Ironically, the sell-off last week came as Congress was finally moving toward passing a bill containing the sort of preventive measures the critics sought -- among them, greater regulatory control over the companies' capital.