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SEPTEMBER : THE TAKEOVER OF FANNIE MAE AND FREDDIE MAC
ter August as competitors dropped out and prices of loans and securities fell.
Lund told FCIC staff that after the liquidity shock, Fannie had “more comfort
that the relationship between risk and price was correct.” Robert Levin, the com-
pany’s chief business officer, recalled, “It was a good time to buy.”
On August , OFHEO’s Lockhart notified Fannie that increasing the portfolio
cap would be “premature” but the regulator would keep the request under “active
consideration.” Lockhart wrote that he would not authorize changes, because Fannie
could still guarantee mortgages even if it couldn’t buy them and because Fannie re-
mained a “significant supervisory concern.” In addition, Lockhart noted that Fannie
could not prudently address the problems in the subprime and Alt-A mortgage mar-
ket, and the company’s charter did not permit it to address problems in the market
for jumbo loans (mortgages larger than the GSEs’ loan limit). Although there had
been progress in dealing with the accounting and internal control deficiencies, he ob-
served, much work remained. Fannie still had not filed financial statements for
or , “a particularly troubling issue in unsettled markets.”
As Lockhart testified to the FCIC, “It became clear by August that the tur-
moil was too big for the Enterprises [the GSEs] to solve in a safe and sound manner.”
He was worried that fewer controls would mean more losses. “They were fulfilling
their mission,” Lockhart told the FCIC, “but they had no power to do more in a safe
and sound manner. If their mission is to provide stability and lessen market turmoil,
there was nothing in their capital structure” that would allow them to do so.
Lockhart had worried about the financial stability of the two GSEs and about
OFHEO’s ability to regulate the behemoths from the day he became director in May
, and he advocated for more regulatory powers for his largely toothless agency.
Lockhart pushed for the power to increase capital requirements and to limit growth,
and he sought authority over mission goals set by the Department of Housing and
Urban Development, as well as litigation authority independent of the Department of
Justice. His shopping list also included the authority to put Fannie and Freddie into
receivership, a power held by bank regulators over banks, and to liquidate the GSEs if
necessary. As it stood, OFHEO had the authority to place the GSEs in conservator-
ship—in effect, to force a government takeover—but because it lacked funding to op-
erate the GSEs as conservator, that authority was impracticable. The GSEs would
deteriorate even further before Lockhart secured the powers he sought.
“THE ONLY GAME IN TOWN”
But Fannie and Freddie were “the only game in town” once the housing market dried
up in the summer of , Paulson told the FCIC. And by the spring of , “[the
GSEs,] more than anyone, were the engine we needed to get through the problem.”
Few doubted Fannie and Freddie were needed to support the struggling housing
market. The question was how to do so safely. Purchasing and guaranteeing risky
mortgage-backed securities helped make money available for borrowers, but it could
also result in further losses for the two huge companies later on. “There’s a real trade-
off,” Lockhart said in late —a trade-off made all the more difficult by the state of
