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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

Listen to this tape describing two American companies and see if you can guess which two:

Ms. BETHANY MCLEAN (Journalist, Vanity Fair): Once you get into them, they're the most interesting companies on the face of the planet, because they're just so weird and you cannot believe that something like this existed for so many years in the supposedly rational world of American business.

BLOCK: That's Vanity Fair journalist Bethany McLean, and she's talking about the mortgage giants Fannie Mae and Freddie Mac.

The two have received more federal bailout money than GM, Goldman Sachs, Bank of America and Citigroup combined. Before the financial crisis, many Americans had never heard of Fannie and Freddie; today, we own them. The federal government took them over in 2008, which means as of the end of last year roughly 90 percent of the mortgages issued in this country went through the federal government.

The U.S. mortgage market is for all intents and purposes a state-run industry.

To tell the story of Fannie and Freddie, our Planet Money team has joined forces with Bethany McLean and with New York Times journalist Joe Nocera, authors of the book "All the Devils are Here." All this week, they'll be exploring how we got here and what happens next for our series, American Housing: The Past, Present and Future of Fannie Mae and Freddie Mac. We begin with this report from Alex Blumberg.

ALEX BLUMBERG: This isn't the first time the government has owned Fannie Mae. That's how it started, as a government agency. It was during the Depression, President Roosevelt wanted to help poor people get houses, so he started an agency nicknamed Fannie Mae to make mortgages more available.

And for decades Fannie Mae remained part of the budget until 1968, when President Lyndon Johnson was facing big deficits from the Vietnam War. Here's reporter Joe Nocera.

Mr. JOE NOCERA (Reporter, New York Times): So, Fannie was sort of spun off, almost like a corporate spin-off. And there really was nothing like it in American life.

BLUMBERG: With just one stroke of the legislative pen, Johnson had ushered into existence perhaps the strangest hybrid entity in the annals of American finance. It was an organization created by the government with an explicitly public mission, but that behaved exactly like a private corporation, with highly paid executives and profits going directly to private owners. A few years later, the government created a second, nearly identical, entity: Freddie Mac.

Karen Petrou is an analyst who studied Fannie and Freddie for decades. And she says the strange hybrid status gave Fannie and Freddie a very real advantage over other traditional companies, because there's this belief about them:

Ms. KAREN PETROU (Analyst): That even though Fannie and Freddie were private, shareholder-owned companies where the CEOs made millions and investors often made a lot of money, they were backed by the full faith and credit of the U.S. government. Sure, it wasn't official, but it was as good as gold.

BLUMBERG: Gold indeed. Just as it's easier to get a loan if you have a rich relative cosign, the financial world assumed that since the U.S. government had given birth to Fannie and Freddie, in a crisis it would act like the rich parent it was and bail them out. And so because of this implicit government guarantee, as it was called, Fannie and Freddie paid less to borrow money than other firms had to, which gave them a huge advantage in the marketplace.

Starting in the '80s and continuing for the next two decades, Fannie and Freddie used this implicit guarantee to grow into two of the largest and most successful companies in U.S. history.

Here's Bethany McLean.

Ms. MCLEAN: Fannie and Freddie were always among the most profitable companies in the S&P 500, if not the most profitable, double or triple that of most banks.

Mr. RICHARD BAKER (Former Representative, Republican, Louisiana): They kept all the money they made and they passed on the risk to the taxpayer in case of a downside event.

BLUMBERG: Richard Baker was a congressman from Louisiana and a longtime critic of Fannie and Freddie. And he was especially concerned about a downside event, because Fannie and Freddie were especially unprepared for one. In the language of finance, they didn't have enough capital.

Capital is the money financial institutions use as a buffer, in case of emergency. And Fannie and Freddie were allowed to hold less than half as much capital as regular banks, which made them riskier, but also more profitable.

These low capital requirements, combined with the implicit government guarantee, amounted to a giant subsidy for Fannie and Freddie. And for years, Baker tried to get rid of this subsidy, to make Fannie and Freddie hold more capital. And for years, Fannie and Freddie shot him down.

Mr. BAKER: Nothing before or ever since, in my judgment, has ever been as effective as their lobbying strategy, breadth and width. If you were a financial services industry lobbyist available for duty in the 1990s and you were not either hired by Fannie or Freddie, I hate to say it now in historical retrospect, but you were really not much of a player.

BLUMBERG: The Fannie Mae lobbying operation in particular achieved something of a legendary status on Capitol Hill. It was rumored they could cost you a committee assignment or even your job.

And this is the point in the story where you'd expect to hear denials from Fannie Mae, saying tales about us are exaggerated. Not so. Ladies and gentlemen, Fannie Mae's chief lobbyist, who left the company in 2004: Bill Maloni.

Mr. BILL MALONI (Former Chief Lobbyist, Fannie Mae): It was always an us against them. Yeah, that was just the Fannie Mae, you know, joke with you, you know, if you punch my brother I'll burn down your house. I want to kill them, bury them, and piss on their graves.

BLUMBERG: One of Bill Maloni's favorite ways to kill them, bury them and -well, you know the rest - was to play the homeownership card. Congress had set goals for Fannie and Freddie, saying that a third to a half of the loans they dealt with were supposed to go to low- and moderate-income households.

So, Bill Maloni argued, sure, we get special treatment but that's because we're special. We help regular people achieve the American dream of homeownership. And many people I talked to within Fannie and Freddie spoke proudly of this affordability mission, believed it. And that, says Bill Maloni, is what made the lobbying effort so successful.

Mr. MALONI: Literally to a person, from cafeteria workers on up, we felt we were the most important thing in the nation with regard to helping low-, moderate- and middle-income families afford homeownership.

BLUMBERG: This view that Fannie and Freddie's hybrid nature was a net win for the country held sway for decades on Capitol Hill. Seemed like a bargain. The government doesn't have to spend a dime; Fannie and Freddie use their massive wealth to carry out a social mission. The only thing is this probably wasn't true.

At least according to Dwight Jaffee, an economist at UC Berkeley, who has spent his career studying the U.S. housing market and has come to a stark conclusion about Fannie and Freddie.

Professor DWIGHT JAFFEE (Economy, UC Berkeley): All of the money and all of the tax benefits and all of the Fannie and Freddie costs that we've poured into it have come to zero in terms of having any observable effects on our homeownership rates. Our rates are the same as countries that have never put a penny of government resources into it.

BLUMBERG: Which raises a question for Dwight Jaffe.

Mr. JAFFEE: How could Fannie and Freddie have been so counterproductive to actually take a government subsidy and have no benefits? And the answer is the shareholders of Fannie and Freddie and the employees of Fannie and Freddie pocketed every penny of the subsidy.

BLUMBERG: Coming up tomorrow when our series continues, Fannie and Freddie's implicit government guarantee becomes explicit.

For NPR News, I'm Alex Blumberg.

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