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Volcker argued that if Fannie reached the razor-thin capital levels it was arguing were sufficient, then it would be able to maintain its solvency under conditions “significantly worse than any experienced” in the postwar era. Volcker’s endorsement gave Fannie’s supporters “no small measure of comfort that the Treasury’s considerably more Draconian proposals won’t fly,” wrote Barron’s. As the bill neared passage, Fannie Mae rounded up other supporters to argue that increasing the firm’s capital reserves would be bad for homeowners. Why? Because it would “limit credit availability and raise interest rates for home buyers,” testified Stephen Ashley, then the president of the Mortgage Bankers Association. A few years later, Fannie named Ashley to its board. Another classic tactic.

As the legislation progressed, Johnson got his lobbyists—and several prominent housing activists—to convince Congress that the new regulator should be placed not within the Treasury or the Fed, which were both regarded as “antihousing,” but at HUD, an agency with very little institutional understanding of banking regulation and risk. Sure enough, the new regulator was housed in HUD. And sure enough, the bill allowed the GSEs to hold far less capital than other financial institutions; by the mid-1990s, the GSEs’ capital was about 2.75 percent of total assets.

There was another little twist that ensured that Fannie Mae would never have much to fear from the new law. Fannie maneuvered to have OFHEO—virtually alone among “safety and soundness” regulators—subject to the appropriations process. This meant that its annual budget was at the mercy of politicians, many of whom often took their cues from Fannie. As a result, one former Freddie Mac lobbyist says, OFHEO had two choices: “Appease Fannie and Freddie or get reamed in the budget.”

Fannie’s new “mission” requirements underwent a similar process. For instance, under the new law 30 percent of the mortgages the GSEs purchased were supposed to be loans made to low- and moderate-income families living in underserved areas. (The goals were increased slightly beginning in 1996.) But the goals were almost laughably meaningless. As the General Accounting Office later noted, they were actually below HUD’s estimates of what the market naturally did already. And since “moderate income” meant those who made 100 percent of a certain area’s median income, a mortgage made to your average American family counted toward the purported goals.

Johnson took great pride in the way Fannie had protected its profits and neutered the law. “It sounds a little muscular, but we wrote the housing goals in 1991 and 1992,” he told friends. “We cooperated with their being written in such a way that they had no teeth.”

When the bill was signed into law, Johnson declared victory. The legislation, he told the Wall Street Journal, “removes any cloud that remains about our government mandate.” Fannie and Freddie, he seemed to be saying, were now officially untouchable. But like David Maxwell’s earlier prediction, it only seemed that way at the time.

Not surprisingly, for the first roughly ten years of its existence, OFHEO was a notoriously weak regulator. There was a two-year stretch in the late 1990s when the agency didn’t even have a director. Fannie executives didn’t have much respect for OFHEO, and few bothered to hide it. When the regulator requested information, the GSEs would often respond that the information was confidential, explains Stephen Blumenthal, the former deputy director of OFHEO. “No one on Wall Street likes the SEC, but no one is crazy enough to fight with them. You try to develop a civil relationship. When I got to OFHEO, I was shocked. Fannie and Freddie were openly abusive to the agency and its staff.” OFHEO itself would later contend that “the goal of [Fannie’s] senior management was straightforward: to force OFHEO to rely on [Fannie itself] for information and expertise to such a degree that Fannie Mae would essentially be regulated only by itself.” Which is pretty much what happened.

At the same time