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and that is what I am concerned about

Mac had to borrow huge sums in wholesale

here. I believe that we, as the Federal

financial markets. Institutional investors were

Government, have probably done too

willing to lend to the government-sponsored

little rather than too much to push

mortgage companies cheaply--at rates only

them to meet the goals of affordable

slightly above those on the Treasury's risk-free

housing and to set reasonable goals. . . .

securities and well below those paid by other

The more people, in my judgment, exag-

financial intermediaries--despite the risk of

gerate a threat of safety and soundness,

default that would normally attach to private

the more people conjure up the possi-

firms holding such highly leveraged and poorly

bility of serious financial losses to the

diversified portfolios. The investors were so will-

Treasury, which I do not see . . . the more

ing only because they thought that the Treasury

pressure there is there, then the less I

would repay them should Fannie or Freddie be

think we see in terms of affordable

unable. As it turns out, they were right. The

housing.12

Treasury did explicitly guarantee Fannie's and

Freddie's debts when the two giants collapsed

In the very same statement Representative

and were placed into conservatorship.

Frank denied that the GSE's debt had any fed-

Congress was repeatedly warned by credi-

The hyperexpan-

eral backing:

ble observers about the growing dangers

sion of Fannie

posed by Fannie Mae's and Freddie Mac's im-

But there is no guarantee, there is no

plicit federal backing. A leading critic was

Mae and Freddie

explicit guarantee, there is no implicit

William Poole, then president of the Federal

Mac was made

guarantee, there is no wink-and-nod

Reserve Bank of St. Louis, who as far back as

possible by their

guarantee. Invest, and you are on your

2003 pointedly warned that the companies

own.13

had insufficient capital to survive adverse con-

implicit backing

ditions, and that the problem would continue

from the U.S.

Of course, Frank was thinking wishfully and

to fester unless Congress explicitly removed

ignoring the obvious. The very "arrange-

the federal backing from the two companies

Treasury.

so that they would face market discipline.11

ments which are of some benefit to them,"

Congress did nothing. Efforts to rein in

that is, the arrangements that enabled Fannie

Fannie and Freddie came to naught because the

Mae and Freddie Mac to borrow at low rates

two giants had cultivated powerful friends on

(in exchange for which privileges they were

Capitol Hill. At hearings of the House Financial

willing to accept affordable housing man-

Services Committee in September 2003, regard-

dates), were nothing other than the implicit

ing Bush administration proposals to change

federal guarantees of their debt.

the regulatory oversight of the GSEs, in his

opening statement Rep. Barney Frank (D-MA)

Conclusion

defended the status quo arrangement on the

grounds that it enabled Fannie and Freddie to

lower mortgage interest rates for borrowers:

The housing bubble and its aftermath

arose from market distortions created by the

Fannie Mae and Freddie Mac have

Federal Reserve, government backing of

played a very useful role in helping

Fannie Mae and Freddie Mac, the Department

make housing more affordable, both in

of Housing and Urban Development, and the

general through leveraging the mort-

Federal Housing Authority. We are experienc-

gage market, and in particular, they

ing the unfortunate results of perverse govern-

have a mission that this Congress has

ment policies.

given them in return for some of the

The traditional remedy for the severely mis-

arrangements which are of some benefit

taken investment policies of private firms--

to them to focus on affordable housing,

shut and dismantle those firms to stop the

7