All the Devils Are Here [108]
In truth, the only way Fannie Mae could continue its rapid growth was to keep expanding its controversial mortgage portfolio. As you’ll recall, there was no particularly good “housing” reason for Fannie Mae to have such a gargantuan portfolio, especially in good times, when there were plenty of buyers of mortgages and mortgage-backed securities. (In bad times, an argument could be made that it was important for Fannie and Freddie to buy up mortgages to keep the mortgage market going. Since the financial crisis, in fact, that is precisely what the GSEs have been doing.) Fannie’s critics were mainly worried about the interest rate risk in the portfolio—and the more the portfolio grew, the more the fears grew as well. To hedge that risk, Fannie and Freddie were huge buyers of derivatives, quite likely the biggest in the country. But hedges don’t always work, and critics feared that if there was an abrupt shift in interest rates and Fannie began taking big losses, the taxpayers would be the ones picking up the tab. After all, Fannie had come close to the brink many years earlier, before David Maxwell saved the company.
If there was one thing Raines had inherited from Jim Johnson, it was a pugnacious attitude toward anyone who dared criticize Fannie Mae; indeed, it sometimes seemed as if he were trying to outdo his predecessor. “I think Frank’s fear was that he couldn’t be tough enough, and he overcompensated,” says a former Fannie executive. For his part, Raines would later say, “We never had any illusion at Fannie that we were all-powerful. If we were all-powerful, we wouldn’t have had to fight so many battles. All day every day, we felt besieged.” As Fannie Mae really did become besieged, so did the ferocity of Fannie’s response—to the company’s, and the country’s, ultimate detriment.
The first real shot across Fannie’s bow during the Raines era came even before the Bush administration took office. Toward the tail end of Clinton’s second term, Richard Baker, a Republican congressman from Louisiana and a longtime critic of the GSEs, introduced a GSE reform bill.5
Larry Summers, who was by then the Treasury secretary, decided to come out in favor of the reforms. There was no way Baker’s bill was going to pass; the combination of a lame-duck Democratic administration, a Republican-controlled Congress, and Fannie and Freddie’s political power made that obvious. But Summers wanted to sound the alarm about the portfolio risks. He got the White House to agree, telling Clinton’s chief of staff, John Podesta, that although Treasury would testify for the bill, it wouldn’t invest any political capital. Maybe, Summers thought, the next administration would pick up the cudgel.
It was strange, in a way. Within the administration, Summers invariably took the Greenspan position that the market was better equipped to recognize and handle risk than Washington regulators. And, like Greenspan, Summers’s belief that the market cured all problems blinded him to the systemic risks that were building up.
But he could see all too clearly the risks posed by Fannie and Freddie. For officials like Greenspan and Summers, there was something offensive about the GSEs. The moral hazard that existed in the banking system—and that would be all too obvious during the financial crisis—was something policy makers couldn’t see. But the moral hazard posed by Fannie and Freddie? That they could see plain as day.
In late 1999, Summers made a speech at a Women in Housing & Finance conference, which included one sentence about Fannie and