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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

it turns out . . . he was able to foresee the market better than a lot of the rest of us
could.”  The new risk officer, Anurag Saksena, recounted to the FCIC staff that he
repeatedly made the case for increasing capital to compensate for the increasing
risk,  although Donald Bisenius, Freddie’s executive vice president for single-family
housing, told FCIC staff that he did not recall such discussions.  Syron never made
Saksena part of the senior management team. 
OFHEO, the GSEs’ regulator, noted their increasing purchases of riskier loans and
securities in every examination report. But OFHEO never told the GSEs to stop.
Rather, year after year, the regulator said that both companies had adequate capital,
strong asset quality, prudent credit risk management, and qualified and active officers
and directors.
In May , at the same time as it paid a  million penalty related to deficien-
cies in its accounting practices, Fannie agreed to limit its on-balance-sheet mortgage
portfolio to  billion, the level on December , .  Two months later, Fred-
die agreed to limit the growth of its portfolio to  per year.  In examination re-
ports for the year , issued to both companies in May , OFHEO noted the
growth in purchases of risky loans and non-GSE securities but concluded that each
GSE had “strong” asset quality and was adequately capitalized. OFHEO reported that
management at Freddie was committed to resolving weaknesses and its Board was
“qualified and active.” The  examination of Fannie was limited in scope—focus-
ing primarily on the company’s efforts to fix accounting and internal control defi-
ciencies—because of the extensive resources needed to complete a three-year special
examination initiated in the wake of Fannie’s accounting scandal. 
In that special examination, OFHEO pinned many of the GSEs’ problems on their
corporate cultures. Its May  special examination report on Fannie Mae detailed the
“arrogant and unethical corporate culture where Fannie Mae employees manipulated
accounting and earnings to trigger bonuses for senior executives from  to .” 
OFHEO Director James Lockhart (who had assumed that position the month the re-
port was issued) recalled discovering during the special examination an email from
Mudd, then Fannie’s chief operating officer, to CEO Franklin Raines. Mudd wrote,
“The old political reality [at Fannie] was that we always won, we took no prisoners . . .
we used to . . . be able to write, or have written rules that worked for us.” 
Soon after his arrival, Lockhart began advocating for reform. “The need for legis-
lation was obvious as OFHEO was regulating two of the largest and most systemati-
cally important US financial institutions,” he told the FCIC.  But no reform
legislation would be passed until July , , and by then it would be too late.

: “Increase our penetration into subprime”

After several years during which Fannie Mae purchased riskier loans and securities,
then-Chief Financial Officer Robert Levin proposed a strategic initiative to “increase
our penetration into subprime” at Fannie’s January  board meeting.  In the
next month the board gave its approval.  Fannie would become more and more ag-
gressive in its purchases. During a summer retreat for Fannie’s senior officers, as