Self-Fulfilling Prophecy: The Bailout Of Fannie Mae And Freddie Mac : Planet Money Fannie Mae and Freddie Mac grew too big to fail. Then the mortgage giants followed the subprime lending industry into the abyss.
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Self-Fulfilling Prophecy: The Bailout Of Fannie And Freddie

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Self-Fulfilling Prophecy: The Bailout Of Fannie And Freddie

Self-Fulfilling Prophecy: The Bailout Of Fannie And Freddie

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MELISSA BLOCK, Host:

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

MICHELE NORRIS, Host:

Today, congressional Republicans introduced legislation that would reform Fannie Mae and Freddie Mac, the two mortgage giants taken over by the government in 2008. All this week, our Planet Money team is partnering with journalists Bethany McLean and Joe Nocera, authors of the book "All the Devils are Here." It's for a special series on Fannie Mae and Freddie Mac.

BLOCK: Again, here's Alex Blumberg.

ALEX BLUMBERG: By the early 2000s, almost 50 percent of all the mortgages in America were made through Fannie Mae and Freddie Mac. The companies had achieved this dominance because of this implicit government guarantee. Because the rest of the world believed the government stood behind them, Fannie and Freddie paid less to borrow money than almost any other financial institution in the country, which gave them a big advantage.

D: This security is not backed by the U.S. government. High-powered government officials denied it, from George Bush's former Treasury secretary, John Snow, to the powerful Democratic congressman Barney Frank. Here he is in September 2003. (Soundbite of archived audio)

BARNEY FRANK: Adding to the course of denial, says journalist Joe Nocera, were Fannie and Freddie themselves.

JOE NOCERA: They would adamantly lash back at anybody who argued that there was in fact a government subsidy.

BLUMBERG: Scott Simon was one of those buyers. He heads the mortgage department at Pimco, the world's largest bond manager, and one of the biggest buyers of Fannie and Freddie securities.

SCOTT SIMON: Fannie and Freddie in meetings with investors, whether it was us or anybody else, essentially just would sort of laugh and say, well, you know the government will stand behind us.

BLUMBERG: They would literally say that you as investors?

SIMON: I think they said that to most investors. You know, they would sort of wink and nod and just sort of say something along the lines of, well, you know the government can't let us go.

BLUMBERG: Barry Zigas was an executive at Fannie Mae during this time, and he says imagine a customer going through the lengthy process of qualifying for a Fannie Mae loan, scraping together a down payment, showing up at the bank office, with all the requisite documents in tow...

BARRY ZIGAS: And they walk out and in the parking lot is a broker saying, would you like a home loan? Because let's sit down right here in my car, I'll get that. We'll do the paperwork right now, which is literally what was happening. And as a consequence, the Fannie Mae share of the market in mortgage-backed securities dropped from, I think it was a combined 70 percent at the beginning of the century down to, like, 30-some- odd percent.

BLUMBERG: And, says Barry Zigas, those private shareholders were not happy with Fannie and Freddie's market decline - and they let the leadership know.

ZIGAS: And it put a tremendous amount of pressure on management.

BLUMBERG: Do you think that pressure led them to make the wrong decision?

ZIGAS: Well, in retrospect it's obvious it was the wrong decision.

BLUMBERG: Still, they didn't follow them all the way down. Their loans never got as risky as a lot of subprime loans did, and so they thought they were being safe. Journalist Bethany McLean.

BETHANY MCLEAN: Instead, they thought, well, we've only done the safe business and we're going to be just fine and this is our opportunity to shine.

BLUMBERG: Jacob Kosoff was a junior-level analyst at Freddie Mac, and he says that throughout the summer of 2008, despite all the turmoil in the housing industry he wasn't that worried. In fact, in late summer of that year, he was feeling good enough to go on a multi-week honeymoon to Peru.

JACOB KOSOFF: I was hiking the Inca Trail with my wife and another couple, a Dutch couple, had walked by us and I was wearing my Freddie Mac, we-make-home-possible T-shirt as I was hiking. And another couple walked by and they said, oh, Freddie Mac. I heard you guys went out of business. Random people I don't know are telling me that my firm, which I had just left two weeks ago to go on vacation, no longer existed.

(SOUNDBITE OF ARCHIVED NEWSCAST)

FRANK: Breaking news: the markets are reacting to the big news on Fannie Mae and Freddie Mac as the government steps in. Let's get you...

BLUMBERG: Unidentified Woman #1: Treasury Secretary Hank Paulson said today the stakes were too big not to act.

(SOUNDBITE OF ARCHIVED NEWSCAST)

HANK PAULSON: Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil here at home and around the globe.

BLUMBERG: Unidentified Woman #2: It is the largest-ever takeover of a financial institution by the federal government in American history.

(SOUNDBITE OF ARCHIVED NEWSCAST)

BLUMBERG: For NPR News, I'm Alex Blumberg.

BLOCK: And to hear yesterday's story, visit our Planet Money website, NPR.org/Money.

(SOUNDBITE OF MUSIC)

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