Shaky Ground: The Strange Saga of the U.S. Mortgage Giants by Bethany McLean

Author:Bethany McLean [McLean, Bethany]
Language: eng
Format: epub, azw
ISBN: 9780990976318
Publisher: Columbia Global Reports
Published: 2015-09-13T22:00:00+00:00

Limbo

Part Three

The Toxic Twins

“It was amazing how little actual authority we had over Fannie and Freddie considering they were entirely dependent on Treasury’s cash to stay alive.”

—Timothy Geithner, Secretary of the Treasury, 2009–2013

Just after Fannie and Freddie were put into conservatorship, Jim Lockhart stepped down as the director of the new agency created to regulate them. He left as acting director Ed DeMarco, the free-market economist who had worked with him on privatizing Social Security—and who had previously recommended the privatization of Fannie and Freddie. While the Obama Administration did try to replace DeMarco, the politics around any appointment that required congressional approval quickly became a manifestation of the increasingly poisonous atmosphere in Washington. And so DeMarco would end up staying in his job for almost six years.

The situation was strange, even by the standards of the GSEs. As a Fannie employee says drily, “It is unusual for a regulator to have a strong point of view that is antithetical to the existence of your regulatee.” That wasn’t the only oddity. DeMarco was a longtime civil servant, and on the surface he appeared to be exactly what you’d expect: mild-mannered and academic. But now he was effectively the CEO of a $5 trillion enterprise on a government salary. Most unusual of all is that DeMarco had a crystal-clear view of what his job as conservator was, and that was to protect taxpayers. There’s an argument that that was not precisely what the law governing conservatorship said (the mandate was to “conserve and preserve” the companies’ assets), but DeMarco would hold true to his view in the face of extraordinary pressure.

In the beginning, it was triage. The market was crashing, home prices were plummeting, and almost everyone thought Fannie and Freddie would be an endless black hole. Quarter after quarter, they posted stunning multibillion-dollar losses, which required huge draws from Treasury. In early 2009, the Treasury amended its agreement to increase the total amount of funding available for Fannie and Freddie from $200 billion to $400 billion—half the 10-year estimated cost of Obamacare. On Christmas Eve, 2009, the Treasury amended the agreement again to remove any cap on the funding for the next three years. In addition, the Federal Reserve began to buy Fannie and Freddie securities to help the perception that they were safe. According to Paul Willen, a senior economist at the Boston Federal Reserve, between 2008 and 2014 the Fed would purchase $2.8 trillion of agency mortgage-backed securities.

Employees of Fannie and Freddie, now dubbed the “Toxic Twins,” were demoralized by the flood of criticism, and under the terms of the conservatorship they weren’t allowed to say anything to defend themselves. They weren’t allowed to lobby, or even go to conferences, talk to academics or thought leaders, write op-eds, or attend outside meetings without permission (which, says an employee, was often withheld). “We had no voice,” says a former executive. “So the philosophy was, ‘Head down, focus on what you can do. We do not want the company to be remembered this way.

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