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Former regulator, CEO blame each other for Fannie's failure

By Zachary A. Goldfarb
Washington Post Staff Writer
Saturday, April 10, 2010

A former regulator of Fannie Mae blamed "greed, excessive risk-taking and abuse" on the part of the company's executives for the events that led to the mortgage giant's failure and bailout.

But Fannie's former chief executive blamed the struggles on an "impossible" set of choices foisted on the District-based company by its government overseers, the Federal Housing Finance Agency.

It was a familiar question of culprit or casualty on Friday during the third day of hearings by the Financial Crisis Inquiry Commission, which is investigating the causes of the economic calamity of the past two years.

Was Fannie Mae, which backed a huge chunk of the nation's home loans, a primary instigator of the crisis? Or was it a victim of flawed public policy and a housing downturn that was worse than anybody could have imagined?

Fannie and its rival, Freddie Mac of McLean, were seized by the FHFA in September 2008 and have since received more than $125 billion in aid to stay afloat. The panel's hearing comes as the Obama administration is preparing to launch a process to decide the companies' fate.

Questions by the commission's six Democratic and four Republican members were aimed at revealing whether executives at Fannie and Freddie rushed into buying hundreds of billions of dollars of risky home loans in pursuit of more business, fatter profits and, ultimately, bigger paychecks.

Former Fannie chief executive Daniel H. Mudd accepted responsibility for the company's struggles and said he was "sorry" that he could not strike a balance that would have allowed the company to survive without government aid.

Fannie and Freddie were odd hybrids created by the government decades ago to foster homeownership but have been owned by private shareholders and run largely like Wall Street investment houses. Treasury Secretary Timothy F. Geithner recently said that the companies' status as shareholder-owned entities with the implicit backing of taxpayers would end.

"On one hand, without revenue and profits and growth, [Fannie and Freddie] could not attract global capital to the U.S. housing market," Mudd said. "And on the other hand, without meeting the mission goals for affordable housing and liquidity, [Fannie and Freddie] could not meet the requirements of their congressional charter."

As the mortgage market deteriorated, Mudd said, Fannie "could not do what a private firm could do." Fannie "had to stay in the market [and] provide liquidity," he said.

Robert Levin, former chief business officer, said the company could have done little to forestall its fate. "Fannie Mae was engulfed by an unprecedented decline in home prices and resulting dislocations in the housing markets," he said.

But the former top regulator of the two companies, Armando Falcon Jr., rejected that view. He said Fannie and Freddie simply wanted to maximize profits, even if it meant entering risky new lines of business, and fought his agency's efforts to pass tighter regulations that would have curbed the firms' business practices.

"The companies were not unwitting victims of an economic down cycle or flawed products and services of theirs," Falcon said. "Their failure was deeply rooted in a culture of arrogance and greed. I should be clear that this was a failure of leadership."

"The Fannie and Freddie political machine resisted any meaningful regulation using highly improper tactics," Falcon added. "While all of this political power satisfied the egos of Fannie and Freddie executives, it ultimately served one primary purpose: the speedy accumulation of personal wealth by any means."

Falcon's successor, James B. Lockhart III, who made the decision to take over the firms and oversaw their final slide, said the companies were joined by many others in misjudging the market.

The companies' "management and the models they relied on failed to identify how badly the mortgage market was deteriorating," he said. "Unfortunately, many others, including bankers, investors, realtors, brokers, home buyers and regulators, failed to understand how bad the toxic mix was."

Lockhart said it was impossible to know whether the failure of the companies could have been averted.

"It was a perfect storm," he said.

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