The end of the 70-year empire

1. Accordingly, he built Fannie into what former congressman Jim Leach, a Republican from Iowa and longtime Fannie gadfly, calls “the greatest, most sophisticated lobbying operation in the modern history of finance.”

2. He may be right. John McCain was embarrassed last summer by revelations that his campaign manager, Rick Davis, had served as the president of the Homeownership Alliance, an advocacy group for Fannie and Freddie Mac, Fannie’s smaller brother. The “revolving door,” as people call it, between the Hill and Fannie and Freddie spun so quickly that it’s actually more surprising when someone isn’t on the list than when they are. Rahm Emanuel served on Freddie’s board! Right-wing godfather Grover Norquist lobbied for Fannie! Newt Gingrich was a consultant for Freddie, and Ralph Reed was a consultant for Fannie!

3.Johnson became the head of the compensation committee, making him the closest thing Hank Paulson had to a boss.

4. the deal Alexander Hamilton cut with Thomas Jefferson and James Madison back in 1790. Jefferson and Madison agreed that the nation would assume the debt of the states; Hamilton agreed that the capital of the country would not be in New York, but rather on the Potomac. “This was a very wise move,” says Gensler, “because for about two centuries it separated the nation’s financial capital from its political capital.” Then he chuckles a little. “It worked until Fannie Mae and Freddie Mac came along.”

5. Or, as former Fannie chief lobbyist Bill Maloni, whose Friday-night poker games for Washington power players were the stuff of legend

6. Not surprisingly, ofheo was a notoriously weak regulator. For almost three years, from February 1997 to September 1999, the agency didn’t even have a director. “The goal of [Fannie’s] senior management was straightforward: to force ofheo to rely on [Fannie itself] for information and expertise to such a degree that Fannie Mae would essentially be regulated only by itself,” wrote ofheo in a report years later.

7. They issued thousands of press releases, which usually featured a local politician prominently assisting Fannie in some good housing-related deed.

8. “ ‘Have you seen our initiative for the handicapped?’ It might have only been for a few dozen loans, but our intent mattered.”

9. The G.S.E.’s also became the place for ex-politicians to work. The Washington Monthly once declared that after he left the White House, Bill Clinton should go to Fannie because “scoring an executive post at Fannie Mae is recognized around establishment Washington as the equivalent of winning the lottery.” After all, where else could you make Wall Street–type money with no financial skills?

10. Frank Raines, who took over from Johnson as C.E.O., told investors that “the future’s so bright that I’m willing to set as a goal that our earnings per share will double over the next five years.”

11. In 2000 the head of Fannie’s office of auditing gave a speech to the company’s internal auditors. “By now, every one of you must have 6.46 branded in your brains,” he said. “You must be able to say it in your sleep, you must be able to recite it forwards and backwards, you must have a raging fire in your belly that burns away all doubts, you must live, breathe, and dream 6.46 After all, thanks to Frank, we all have a lot of money riding on it.”

12. “All the V.P.’s in the company looked at each other and said, ‘How is that going to happen?”’ says a former executive.

13. As the critics became more vehement, Fannie’s responses became ever tougher. Its customers, including major banks, who were terrified of its rapid growth and Raines’s grand plans, set up a group called FM Watch, which began its own anti-G.S.E. lobbying effort. Fannie responded by comparing FM Watch to Slobodan Milošević, the Serb dictator who was charged with crimes against humanity for his role in the Balkan wars.

14. In 2002, Karl Rove invited Raines to Bush’s economic summit in Waco. Raines still keeps a “Doonesbury” cartoon on his wall that features an admiring Bush saying, “Franklin can tell you … ”

15. Congressman Barney Frank, a Massachusetts Democrat and longtime supporter of the G.S.E.’s,

16. Paulson did not believe that the G.S.E.’s were the bogeymen of the financial system. After all, they had been major clients of his for years, and the ties between Goldman and Fannie ran deep. “I was aghast,” says a longtime G.S.E. foe, expressing a common attitude. “Here we were fighting trench warfare with Fannie and Freddie, and Paulson says, ‘Let’s cut a deal and say we won.’ Some of us really did believe they were a house of cards.”

17. These were often referred to as private-label securities, or P.L.S.’s, because they bypassed Fannie and Freddie and didn’t have the G.S.E. imprimatur. As a result, Fannie and Freddie, which had always been selective as to which mortgages met their criteria for purchase, saw their market share plunge. Shareholders and customers were begging them to dive into this new, highly profitable world.

18. “We’re rushing to get back into the game,” Mudd told analysts in the fall of 2006. “We will be there.”

19. Even so, “is there anything dumber than the suggestion that the institutions to rescue the U.S. mortgage market are institutions that are leveraged 60 to 1 and only own U.S. mortgages?”

20. In other words, Fannie dove into Alt-A not because of its mission but because of its bottom line—and because its executives feared that Fannie would become irrelevant if it continued to say no to this brave new world.

21. Slipped in was a provision that exempted Fannie’s and Freddie’s boards from shareholder lawsuits—which was an enormous threat—if they agreed to conservatorship in time of crisis.22. Paulson’s bazooka to help Fannie and Freddie failed.

23. “We’ve closed the book on 70 years of housing policy in this country.”

24. government officials refuse to confirm that the U.S. actually guarantees Fannie’s and Freddie’s debt. Instead, they say there is an “effective guarantee”—which means nothing in a market as untrusting as this oneFinally:

25. Maybe the truth is that, as one person puts it, “everyone was still scared of Fannie Mae and Freddie Mac"

http://www.vanityfair.com/politics/features/2009/02/fannie-and-freddie200902