All the Devils Are Here [32]
And Fannie and Freddie had far more friends than critics, including some powerful Republicans. Republican senator Phil Gramm, an ardent champion of free markets, was in as good a position as any to cause Fannie and Freddie trouble; he became the chairman of the Senate banking committee in 1994. But Gramm always gave Fannie and Freddie a pass. Why? Because, like Johnson, Gramm saw the political fruit that homeownership could bear. According to a former banking committee staffer, the Republicans studied what it was that made people vote Republican. “The number one predictor of voting Republican was a job in the private sector,” he said. “Number two, and it’s a close second, is that you own your own home.” He adds, “Gramm preached that gospel to all who would listen.”
Then again, maybe Fannie’s tendency, as Maloni later put it, “to throw one brick too many rather than one brick too few” wasn’t so surprising after all. When you got right down to it, there was something about the GSEs’ business model that made no sense. Nobody in his or her right mind would establish a company whose competitive advantage was built on a guarantee that was nowhere written down and that no one could say for sure even existed. Yet that was the premise upon which Fannie Mae and Freddie Mac had built their dominance. Their advantages were based in large part on the belief by investors that the government would never let the GSEs default.
When Fannie dealt with investors, it encouraged that perception. (It once claimed that its securities were even safer than triple-A-rated bonds because of the “implied government backing of Fannie Mae.”) Yet whenever anyone in government brought it up, Fannie Mae went mildly berserk. To admit that it had government backing would mean admitting that taxpayer support was the key source of Fannie’s huge profits—and that taxpayers would be on the hook if anything went wrong. And that was something Fannie could never concede. That’s why even the most muted criticism was treated as life or death—because Fannie Mae always felt that it was life or death. Some former lobbyists used to compare Fannie to the old Oakland Raiders, whose motto in the seventies was “Just win, baby.”
There was another reason why Fannie Mae was so quick to push back against its critics. Over time, the bulk of its profits were being generated from an activity that critics said—correctly—had nothing whatsoever to do with helping people buy affordable homes.
The business of stamping mortgages with its guarantee and turning them into mortgage-backed securities was a good, steady business. It gave Fannie Mae and Freddie Mac immense power in the marketplace. But while profitable, it wasn’t off-the-charts profitable; it didn’t generate the kind of profits that put companies in the upper echelon of American business. For that, Fannie and Freddie turned to another activity: they began to build up their own portfolios of mortgages and mortgage-backed securities, which they held on their own books, instead of selling them to investors.
Although owning a portfolio of mortgages had almost bankrupted Fannie in the early 1980s, the company never got rid of its portfolio entirely. “We always viewed it as a core part of the business,” says Maxwell. Fannie’s mantra was “Good times and bad,” meaning it would be in the market when investors were eager to buy mortgages, as well as when they were uninterested—and the only alternative was for Fannie to hold the mortgages in a portfolio. Maxwell, typically, had kept the portfolio fairly small so it wouldn’t attract too much attention.
Johnson, also typically, expanded it exponentially. The core idea behind the portfolio reflected, once again, the advantages of being a GSE. Fannie