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17

SEPTEMBER 2008: THE TAKEOVER
OF FANNIE MAE AND FREDDIE MAC

CONTENTS

“A good time to buy”...........................................................................................
“The only game in town”....................................................................................
“It’s a time game . . . be cool”...............................................................................
“The idea strikes me as perverse” .......................................................................
“It will increase confidence”................................................................................
“Critical unsafe and unsound practices” ............................................................
“They went from zero to three with no warning in between” .............................
“The worst-run financial institution”.................................................................
“Wasn’t done at my pay grade”...........................................................................

From the fall of  until Fannie Mae and Freddie Mac were placed into conserva-
torship on September , , government officials struggled to strike the right bal-
ance between the safety and soundness of the two government-sponsored enterprises
and their mission to support the mortgage market. The task was critical because the
mortgage market was quickly weakening—home prices were declining, loan delin-
quencies were rising, and, as a result, the values of mortgage securities were plum-
meting. Lenders were more willing to refinance borrowers into affordable mortgages
if these government-sponsored enterprises (GSEs) would purchase the new loans. If
the GSEs bought more loans, that would stabilize the market, but it would also leave
the GSEs with more risk on their already-strained balance sheets.
The GSEs were highly leveraged—owning and guaranteeing . trillion of mort-
gages with capital of less than . When interviewed by the FCIC, former Treasury
Secretary Henry Paulson acknowledged that after he was briefed on the GSEs upon
taking office in June , he believed that they were “a disaster waiting to happen”
and that one key problem was the legal definition of capital, which their regulator
lacked discretion to adjust; indeed, he said that some people referred to it as “bullsh*t

capital.” Still, the GSEs kept buying more of the riskier mortgage loans and securi-
ties, which by fall  constituted multiples of their reported capital. The GSEs
