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Mortgage Giants' Mess Falls to Their Regulator

As Fannie and Freddie's regulator, James Lockhart said he was
As Fannie and Freddie's regulator, James Lockhart said he was "obviously wrong" months ago when he called fears of a government bailout "nonsense." (Dennis Brack - Bloomberg News)
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In July, as panicked investors dumped stock in the two companies, Lockhart declared that their capital levels were "well in excess" of federal requirements. "At a very difficult time in the market, the enterprises have the flexibility and sound operations needed to support their mission."

In late July, Congress created a more powerful agency to replace OFHEO, and Lockhart was named to head it.

In recent weeks, FHFA examiners, working with the Federal Reserve and other agencies, concluded that the underlying economics of Fannie Mae and Freddie Mac were precarious.

"The issues were pervasive" with the companies' ability to stay solvent and manage risk, Lockhart said in the interview. Without taking them over, he said, "they could have caused a significant systemic event" in the world markets.

In separate meetings Friday at his agency's headquarters near the White House, he and Paulson told the heads of Fannie Mae and Freddie Mac they should consent to being taken over by the government -- and signaled that if they did not, the government would do it, according to people familiar with the matter who spoke anonymously because the talks were private.

In the interview, Lockhart said he was surprised by how fast the companies ran into severe trouble.

"No one projected how bad this market was going to get," he said. "We thought with the ability to raise capital in a significant amount they could weather this storm. But what happened, of course, is the storm got worse and worse."

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