How Fannie and Freddie foiled regulators

Washington Examiner
Editorial
4/12/2010

Mismanagement of Fannie Mae and Freddie Mac and obstruction of their regulators by Congress and successive presidential administrations played a pivotal role in creating and then bursting the housing bubble at the heart of the economic meltdown of 2008, according to testimony of officials before the congressionally chartered Financial Crisis Inquiry Commission. Rather than offer a serious discussion of how to reform the two government-sanctioned enterprises (GSEs), however, President Obama and the Democratic leadership in Congress are only offering legislation to punish bank CEOs and stiffen regulations for private sector banks.

In 2006, Dan Mudd, then Fannie Mae’s chief operating officer, wrote in an e-mail to Chief Executive Officer Franklin Raines that the GSE desperately needed reform because “the old political reality was that we always won, we took no prisoners … we used to… be able to write, or have written, rules that worked for us.” Mudd’s e-mail was cited in testimony last week before the FCIC by James B. Lockhart, who in 2006 was acting director of the Office of Federal Housing Enterprise Oversight (OFHEO), the GSE watchdog. Lockhart said OFHEO’s regulatory authority was inadequate because “[Fannie and Freddie] could borrow so cheaply and at unlimited amounts to fund their portfolios because their lenders and rating agencies applied no market discipline.”

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