Fannie, Freddie 'Catastrophe' Began In 1991

It's been more than three years since the government bailed out mortgage giants Fannie Mae and Freddie Mac. Gretchen Morgenson, of The New York Times, has co-authored a book about Fannie and Freddie called Reckless Endangerment. Morgenson talks to Linda Wertheimer about the taxpayer-owned entities.

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LINDA WERTHEIMER, HOST:

Three years ago, the government bailed out Fannie Mae and Freddie Mac, the hybrid public-private mortgage institutions. Gretchen Morgenson of the New York Times and her co-author Joshua Rosner wrote a book about them called "Reckless Endangerment." We asked Morgenson about Fannie and Freddie today.

GRETCHEN MORGENSON: They are taxpayer-owned entities. The taxpayer has had to support them to the tune of $150 billion so far. That's by no means the end of the line. There will be further losses, undoubtedly. But what you're seeing now is the effects of the risky mortgages that these entities either purchased from banks and lenders, or guaranteed.

WERTHEIMER: The Securities and Exchange Commission last week accused six former officials - including former CEOs of Fannie and Freddie - of fraud, of ensuring investors that their portfolio of bad loans was substantially smaller than it really was. What's the likely outcome, do you think, of those cases?

MORGENSON: Well, as you know, the SEC rarely brings these cases to court. They generally settle. Usually, it's a monetary settlement, a penalty of some kind. So I'm anticipating that will be what happens here. It would be unfortunate, because I think that it would be very interesting to see what comes out in a courtroom, in a trial, because then the American people will really have a far greater grasp of what these entities were doing.

WERTHEIMER: Now, if you just go back to six former executives in these two large institutions, you're still not reaching back far enough to identify the people who set this thing in motion.

MORGENSON: That's correct. A catastrophe this large cannot happen overnight. This really began in 1991 and '92, when Congress was considering legislation to protect the taxpayer for just these kinds of losses. At the moment, they were worried about the S and L crisis, which, as you remember, had arisen out of a lot of failed banks. They were worried that these kinds of losses might be in Fannie Mae and Freddie Mac's portfolio, and they wanted to craft legislation that would increase the strength of the regulator and that would increase the capital requirements of the companies - i.e., money that they would have to set aside for a rainy day. But what happened was the company did everything it could and successfully defanged that legislation.

WERTHEIMER: Why were they able to do that? How did that work?

MORGENSON: It was a traditional lobbying effort in which they threw money at legislators. Both sides of the aisle received donations from Fannie Mae and Freddie Mac. It was a political machine par excellence.

WERTHEIMER: Now, is there any possibility of criminal prosecution for the losses at Fannie and Freddie? A lot of people did make a lot of money. Is there any chance that any of them will, you know, will have to take something more than a fine for what they've done?

MORGENSON: A very little likelihood. Certainly, the SEC is not allowed to bring criminal cases. They are not criminal enforcement entity. You know, we have seen absolutely no indication that the Justice Department is investigating Fannie Mae and Freddie Mac. And, you know, if you want real perverse paradoxes, let's face the fact that the American taxpayer, because we own these entities, are actually paying the legal bills of the executives who are being sued now by the SEC.

WERTHEIMER: Gretchen Morgenson, thank you very much.

MORGENSON: You're welcome.

WERTHEIMER: Gretchen Morgenson is a reporter and columnist for the New York Times and is the author, with Joshua Rosner, of "Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon."

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