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different if Fannie Mae had lost control of it at that critical juncture. And the battle between Fannie and Wall Street did have consequences that would linger for a very long time. The threats that Fannie had faced—not just from a Wall Street that wanted to clip its wings, but from a White House that wanted to take away its built-in advantages—deeply affected Fannie’s corporate mind-set. Its attitude became one of outsized aggression toward even the most insignificant of threats. “You punch my brother, I’ll burn your house down” was the saying around the company. The idea that Fannie should be stripped of its government advantages became, in Maloni’s words, “the vampire issue”: it never completely went away. Fannie always felt that its opponents, whether competitors or critics in the government, were out to kill it. In this, it was absolutely right.

In addition, the REMIC fight established Fannie and Freddie as forces not just in Washington but on Wall Street. The two companies completely dominated the market for so-called conforming mortgages—that is, thirty-year fixed mortgages under a certain size made to buyers with good credit histories. “It was the end of the game,” says Nevins. By the end of the 1980s, there was more than $611 billion worth of outstanding GSE-guaranteed mortgage-backed securities, according to a study by economic consulting firm Empiris LLC. The outstanding volume of private mortgage-backed securities—the ones without GSE guarantees—was just $55 billion, less than one-tenth that amount. Fannie, meanwhile, went from losing a million dollars a day to making more than $1 billion a year. Its market value exploded from $550 million to $10.5 billion.

As for the larger dangers of mortgage-backed securities—the ones that would emerge in the years before the financial crisis—they were largely overlooked as Wall Street and the GSEs raced to establish a market for their new miracle product. Largely, but not entirely. At one congressional hearing, Leon Kendall, then chairman of the Mortgage Guaranty Insurance Corporation, a private insurer of mortgages, offered up a prophetic warning: “With all our concern in enhancing the secondary mortgage market, we should continue to have appropriate and equivalent concern relative to keeping people in houses.” Historically, he noted, less than 2 percent of people lost their homes to foreclosure, because “what was good for the lending institution was also good for the borrower.” But the new securitization market threatened to change that, because once a lender sold a mortgage, it no longer had a stake in whether the borrower could make his or her payments. He concluded, “The linkage, which I support fully, between the mortgage originator and the secondary market must be built carefully and appropriately.... Unless we have sound loans . . . we are going to find that the basic product we are trying to enhance and multiply will turn out soiled.”

While securitization appeared to be alchemy, it wasn’t, in the end, a magic trick. All the risks inherent in mortgages hadn’t disappeared. They were still there somewhere, hidden, lurking in a dark corner. Dick Pratt, who had left the Federal Home Loan Bank Board to become the first president of Merrill Lynch Mortgage Capital, used to put it this way: “The mortgage is the neutron bomb of financial products.”

There was one final consequence. After the REMIC battle, Wall Street realized it was never going to dislodge Fannie and Freddie from their dominant position as the securitizers of traditional mortgages. If it hoped to circumvent the GSEs and keep all the profits to itself, Wall Street would have to find some other mortgage product to securitize, products that Fannie and Freddie couldn’t—or wouldn’t—touch. As Maxwell later put it, “Their effort became one to find products they could profit from where they didn’t have to compete with Fannie.”

He added, “That’s ultimately what happened.”

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“Ground Zero, Baby”

The birth of mortgage-backed securities didn’t just change Wall Street and the GSEs. It changed the mortgage business