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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
out of here. Instead, they went from zero to three with no warning in between.” A
review of the examination reports and other documents provided by FHFA to the
FCIC largely supports Mudd’s view on this specific point. While OFHEO’s examina-
tion reports noted concerns about increasing credit risk and slow remediation of de-
ficiencies required by the May consent agreement, they do not include the
sweeping criticisms contained in the September letter.
Two days after their two companies were designated “critical concerns,” Mudd at
Fannie and Syron at Freddie faced a government takeover. On September , FHFA
Acting Deputy Director Chris Dickerson sent separate memos to Lockhart recom-
mending that FHFA be appointed conservator for each GSE.
Still, conservatorship was not a foregone conclusion. Paulson, Lockhart, and
Bernanke met with Mudd, Syron, and their boards to persuade them to cede con-
trol. Essentially the GSEs faced a Hobson’s choice: take the horse offered or none at
all. “They had to voluntarily agree to a consent agreement,” Lockhart told the FCIC.
The alternative, a hostile action, invited trouble and “nasty lawsuits,” he noted. “So we
made a . . . very strong case so the board of directors did not have a choice.” Paulson
reminded the GSEs that he had authority to inject capital, but he would not do so un-
less they were in conservatorship.
Mudd was “stunned and angry,” according to Paulson. Tom Lund, who ran Fan-
nie Mae’s single-family business, told the FCIC that conservatorship came as a sur-
prise to everyone. Levin told the FCIC that he never saw a government seizure
coming. He never imagined, he said, that Fannie Mae was or might become insol-
vent. Interviewed in , Mudd told the FCIC: “I did not think in any way it was
fair for the government to have been in a position of being in the chorus for the com-
pany to add capital, and then to inject itself in the capital structure.” The conserva-
torship memoranda reiterated all the damning evidence presented in the letters two
days earlier. Losses at Fannie Mae for the year were estimated to be between bil-
lion and billion. Freddie Mac’s memorandum differed only in the details. Its
losses, recorded at billion in the first six months of , were projected to end up
between and billion by the end of the year.
Although the boards had a choice, the only realistic option was assent. “We were go-
ing to agree to go in a conservatorship anyway,” Syron told the FCIC. “There was a very
clear message that the [September ] letter was there as a mechanism to bring about a
result.” Mudd agreed, observing that “the purpose of the letter was really to force con-
servatorship.” The boards of both companies voted to accept conservatorship.
Both CEOs were ousted, but the fundamental problems persisted. As promised,
the Treasury was prepared to take two direct steps to support solvency. First, it would
buy up to billion of senior preferred stock from the GSEs and extend them
short-term secured loans. In addition, it pledged to buy GSE mortgage–backed secu-
rities from Wall Street firms and others until the end of . Up front, Treasury
bought from each GSE billion in preferred stock with a dividend. Each GSE
also gave Treasury warrants to purchase common stock representing . of shares
outstanding. Existing common and preferred shareholders were effectively wiped
out. The decline in value of the preferred stock caused losses at many banks that held
