All the Devils Are Here [114]
In truth, the Treasury Department could have done something about the GSEs even without new legislation. During the early stages of Operation Noriega, Treasury had researched an obscure provision in a 1954 law that appeared to give the Treasury the right to limit the GSEs’ issuance of debt. Treasury and the Justice Department concluded that Treasury did, indeed, have that right. By exercising it, they could have shut down the GSEs entirely. But they never tried. Even the Bush administration was afraid to see what would happen to the mortgage market without Fannie and Freddie.
Fannie’s new CEO was Daniel Mudd, a self-deprecating ex-Marine who had run General Electric’s Japanese operation before joining Fannie Mae in 2000. The son of the well-known television journalist Roger Mudd, the new chief executive could not have been more different from his three predecessors. He wasn’t a Democrat, a Washington power player, or a houser. He and Raines had never been close, and Mudd had thought about leaving the company because he didn’t like its “arrogant, defiant, my-way Fannie Mae,” as he later put it. When he became CEO, he embarked on a strategy of conciliation. “I thought for a very long time that it was our fault, because we were heavy-handed, because we had a propaganda machine,” he said. Though he tried to patch things up with the administration, no one in the White House would take his calls.
On the other hand, the White House was the least of Mudd’s problems. While Washington had been transfixed by the war between Fannie and the White House, something every bit as dramatic was taking place in the marketplace: Fannie’s stranglehold on the secondary mortgage market was weakening. And not just by a little. In 2003, Fannie Mae’s estimated market share for bonds backed by single-family housing was 45 percent. Just one year later, it dropped to 23.5 percent. As a 2005 internal presentation at Fannie Mae noted, with some alarm, “[P]rivate label volume surpassed Fannie Mae volume for the first time.”
There was no question about why this was happening: the subprime mortgage originators were starting to dominate the market. They didn’t need Fannie and Freddie to guarantee their loans—and for the most part didn’t want the GSEs mucking around in their business. The subprime originators sold their loans straight to Wall Street, which, unlike the GSEs, didn’t really care whether they could be paid back. “The subprime market needed the companies who created all the rules to go away,” says subprime entrepreneur Bill Dallas. “Fannie and Freddie were in the penalty box. They were gone.”
As Fannie’s market share dropped, the company’s investors grew restless—so restless that Fannie hired Citigroup to look at what Citi called “strategic alternatives to maximize long-term Phineas [the code name the Citi team gave Fannie] shareholder value.” In a July 2005 presentation, Citi concluded that Fannie shouldn’t privatize, because its charter was its “core asset,” accounting for up to 50 percent of its current market capitalization. Among Citi’s key recommendations for increasing that market capitalization: Fannie should begin guaranteeing “non-conforming residential mortgages”—i.e., subprime.
Fannie’s relationship with its biggest customer, Countrywide, was also increasingly difficult. In some years, Countrywide generated a quarter of the loans purchased by Fannie; and the company had long supported certain key Mozilo causes, like low down payments. “The single defining quality of that relationship was the mutual