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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

On the next day, March , Treasury and White House officials received additional
information about Fannie’s condition. The White House economist Jason Thomas
sent Steel an email enclosing an alarming analysis: it claimed that in reporting its
 financial results, Fannie was masking its insolvency through fraudulent ac-
counting practices. The analysis, which resembled one offered in a March  Barron’s
article, stated:

Any realistic assessment of Fannie Mae’s capital position would show
the company is currently insolvent. Accounting fraud has resulted in
several asset categories (non-agency securities, deferred tax assets, low-
income partnership investment) being overstated, while the guarantee
obligation liability is understated. These accounting shenanigans add up
to tens of billions of exaggerated net worth.
Yet, the impact of a tsunami of mortgage defaults has yet to run
through Fannie’s income statement and further annihilate its capital.
Such grim results are a logical consequence of Fannie’s dual mandate to
serve the housing market while maximizing shareholder returns. In try-
ing to do both, Fannie has done neither well. With shareholder capital
depleted, a government seizure of the company is inevitable. 

Given the turmoil of the Bear Stearns crisis, Paulson said he wanted to increase
confidence in the mortgage market by having Fannie and Freddie raise capital. Steel
told him that Treasury, OFHEO, and the Fed were preparing plans to relax the GSEs’
capital surcharges in exchange for assurances that the companies would raise capital.
On March , , Steel also reported to his Treasury colleagues that William
Dudley, then executive vice president of the New York Fed, wanted to “harden” the
implicit government guarantee of Freddie and Fannie. Steel wrote that Dudley
“leaned on me hard” to make the guarantee explicit in conjunction with dialing back
the surcharge and attempting to raise new capital, and Steel worried about how this
might affect the federal government’s balance sheet: “I do not like that and it has not
been part of my conversation with anyone else. I view that as a very significant move,
way above my pay grade to double the size of the U.S. debt in one fell swoop.” 

“THE IDEA STRIKES ME AS PERVERSE”

Regulators at OFHEO and the Treasury huddled with GSE executives to discuss low-
ering capital requirements if the GSEs would raise more capital. “The entire mort-
gage market was at risk,” Lockhart told the FCIC.  The pushing and tugging
continued. Paulson told the FCIC that personal commitments from Mudd and Fred-

die Mac CEO Richard Syron to raise capital cinched the deal. Just days earlier, on
March , Syron had announced in a quarterly call to investors that his company
would not raise new capital. Fannie and Freddie executives prepared a draft press re-
lease before a discussion with Lockhart and Steel. It announced a reduction in the
capital surcharge from  to . Lockhart was not pleased; the draft lacked a com-