Even the partisan Financial Crisis Inquiry Commission, created by the 2009 Pelosi Congress and chaired by a former state Democratic Party chairman, didn’t try to sell that line. As much as the Democratic majority on the panel wanted to absolve Washington of its role in creating the crisis, it had to give the two government-created mortgage monsters their due. The committee’s report dubbed Fannie and Freddie the “kings of leverage” and described all of the ways they avoided oversight while relaxing underwriting standards and raising their bets on subprime mortgages.
The two companies, which profited from an implicit government guarantee, owned or guaranteed $5 trillion of mortgage assets. Sometimes they bought home loans and bundled them into securities for sale to other investors, and sometimes they bought securities that others had assembled. They were the biggest buyers of subprime bundles during the housing boom, and their lust for those bundles fed the subprime machines at Countrywide (later bought by Bank of America) and Washington Mutual (bought at federal request by J.P. Morgan).
After it all fell apart, the only debate was whether the twin disasters at Fan and Fred were primarily the result of federal “affordable housing goals” or executives’ desire for bigger profits and bonuses. Being Democrats, the commission majority settled on greed as the principal problem at Fan and Fred, but nobody concluded that they were victims.
The commission learned from John Kerr, an examiner with the Federal Housing Finance Agency (FHFA), that Fannie was “the worst-run financial institution” he had seen in 30 years as a bank regulator. Austin Kelly, an official at FHFA’s predecessor agency, said regulators couldn’t trust Fannie’s numbers because their “processes were a bowl of spaghetti.”
And you should hear what people were saying inside these firms. Former Fannie Mae Chief Risk Officer Enrico Dallavecchia wrote in a 2007 email to the company’s COO that Fannie “was not even close to having proper controls processes for credit, market and operational risk.” He added that “people don’t care about the [risk] function or they don’t get it.”
Over at Freddie, former CEO Richard Syron acknowledged in an interview with the commission that one of the reasons he fired longtime chief risk officer David Andrukonis in 2005 was that Mr. Andrukonis opposed relaxing Freddie’s loan underwriting standards. According to civil charges filed by the Securities and Exchange Commission, around the end of 2004 Mr. Syron rejected the advice of Freddie credit risk officers who had urged him to stop Freddie from guaranteeing so-called NINA loans, which required no verification of borrower income or assets.
Adding to the absurdity of the FHFA suit, even Fannie and Freddie don’t claim they were innocent. The two companies have agreed to a deferred prosecution agreement in which they don’t deny misleading investors about the size of their investments in subprime mortgages and liar loans.
The SEC is still suing former senior executives at both companies for securities fraud. The cases may not come to trial until 2015, which is convenient for the government as it pursues the Fan-and-Fred-as-victims case with Morgan and other banks. You never know what a trial might tell us about how the companies decided to buy mortgage-backed securities sold by banks.
But we do already know that Fan and Fred were in constant communication with issuers and were informed in detail what exactly they were buying. In its 2005 annual report, Freddie told investors: “We manage institutional credit risk on non-Freddie Mac mortgage-related securities by only purchasing securities that meet our investment guidelines and performing ongoing analysis to evaluate the creditworthiness of the issuers and servicers of these securities and the bond insurers that guarantee them.”
The company added that as part of its rigorous reviews “we may perform additional analysis, including on-site visits, verification of loan documentation, review of underwriting or servicing processes and similar due diligence measures.”
The evidence against Fan and Fred is so voluminous we could go on listing it for days, but the feds want everyone to forget all that as they try to whitewash Washington’s role in the panic. They present the duo as victims to extort $5 billion from Morgan, which never needed a bailout, to make up for the $188 billion taxpayer bailout that Fan and Fred required. Little Orphan Fannie is one more political disguise for the bandits of the Beltway.