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How Washington Failed to Rein In Fannie, Freddie

In 2003, Richard Baker, left, obtained executive pay information on Fannie and Freddie but was pressured not disclose it. In 1999, Treasury Secretary Lawrence Summers publicly signaled that Fannie, Freddie could be a hazard.
In 2003, Richard Baker, left, obtained executive pay information on Fannie and Freddie but was pressured not disclose it. In 1999, Treasury Secretary Lawrence Summers publicly signaled that Fannie, Freddie could be a hazard. (By Susan Walsh -- Associated Press)
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Most of all, the company leaned on its Congressional supporters.

In the Senate, Robert F. Bennett (R-Utah) added an amendment giving Congress the ability to block receivership, weakening that bill to the point where the White House would no longer support it. Bennett's second-largest contributor that year was Fannie Mae; his son was then the deputy director of Fannie's regional office in Utah.

Fannie Mae even persuaded the New York Stock Exchange to allow its shares to keep trading. The company had not issued a required report on its financial condition in a year. The rules of the exchange required delisting. So the exchange created an exception when "delisting would be significantly contrary to the national interest."

The amendment was approved by the Securities and Exchange Commission. FNM would remain on the NYSE.

The Final Blow

As Fannie Mae and Freddie Mac were trying to recover from their accounting scandals, a new and ultimately mortal threat emerged. Yet again, the warnings went unheeded for too long.

The companies had begun buying loans made to borrowers with credit problems.

Fannie Mae and Freddie Mac had been losing market share to Wall Street banks, which were doing boomtown business packaging these riskier loans. The mortgage finance giants wanted a share of the profits.

Soon, the firms' own reports were noting the growing risk of their portfolios. Dense monthly summaries of the companies' mortgage purchases were piling up at OFHEO.

An employee at one of the companies said it was already a constant discussion around the office in 2004: When would the regulators notice?

"It didn't take a lot of sophistication to notice what was happening to the quality of the loans. Anybody could have seen it," the staffer said. "But nobody on the outside was even questioning us about it."

President Bush had pledged to create an "ownership society," and the companies were helping the administration achieve its goal of putting more than 10 million Americans into their first homes.

Fannie Mae and Freddie Mac's appetite for risky loans was growing ever more voracious. By the time OFHEO began raising red flags in January 2007, many borrowers were defaulting on loans and within months Fannie Mae and Freddie Mac would be running out money to cover the losses.

Finally, as the credit crisis escalated, Congress passed a bill two months ago establishing a tough, new regulator for the companies. It was too late.


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