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SEPTEMBER : THE TAKEOVER OF FANNIE MAE AND FREDDIE MAC 

mitment to raise additional capital, stating instead that the GSEs planned to raise it

“over time as needed.” It looked as if the GSEs were making the deal with their fin-
gers crossed. In an email to Steel and the CEOs of both entities, Lockhart wrote: “The
idea strikes me as perverse, and I assume it would seem perverse to the markets that
a regulator would agree to allow a regulatee to increase its very high mortgage credit
risk leverage (not to mention increasing interest rate risk) without any new capital.”
The initial negotiations had the GSEs raising  of capital for each  of reduction in
the surplus. Lockhart wrote in frustration, “We seem to have gone from  to  right
through  to  to now  to .” 
Despite Lockhart’s reservations, OFHEO announced the deal, unaltered in any
material way, on March . OFHEO agreed to ease the capital restraint from  to
; Fannie and Freddie pledged to “begin the process to raise significant capital,”

giving no concrete commitment. Paulson told the FCIC that the agreement, which
included a promise to raise capital, was “a no-brainer,” and that he had no memory of
Lockhart ever having called it “perverse.” 
The market analyst Joshua Rosner panned the deal. “We view any reduction [in
capital] as a comment not only on the GSEs but on the burgeoning panic in Wash-
ington,” he wrote. “If this action results in the destabilizing of the GSEs, OFHEO
will go from being the only regulator that prevented its charges from getting into
trouble, to a textbook example of why regulators should be shielded from outside
political pressure.” 
Fannie would keep its promise by raising . billion in preferred stock. Freddie
reneged. Executive Vice President Donald Bisenius offered two reasons why, in hind-
sight, Fannie Mae did not raise additional capital. First was protecting the assets of
existing shareholders. “I’m sure [Fannie’s] investors are not very happy,” Bisenius told
the FCIC. “Part two is . . . if you actually fundamentally believe you have enough cap-
ital to withstand even a fairly significant downturn in house prices, you wouldn’t
raise capital.” 
Similarly, CEO Syron spoke of the downside of raising capital on August , :
“Raising a lot more capital at these kinds of prices could be quite dilutive to our

shareholders, so we have to balance the interest of our shareholders.” But Lockhart
saw it differently; in his view, Syron’s public comments put “a good face on Freddie’s
inability to raise capital.” He speculated that Syron was masking a different concern:
lawsuits. “[Syron] was getting advice from his attorneys about the high risk of raising
capital before releasing [quarterly earnings] . . . and our lawyers could not disagree
because we know about their accounting issues,” Lockhart told the FCIC. 

“IT WILL INCREASE CONFIDENCE”

In May, the two companies announced further losses in the first quarter. Even as the
situation deteriorated, on June  OFHEO rewarded Fannie Mae for raising . bil-
lion in new capital by further lowering the capital surcharge, from  to . In
June, Fannie’s stock fell ; Freddie’s, . The price of protection on  million in
Fannie’s debt through credit default swaps jumped to , in June, up from