Tuesday, December 9, 2008

Fannie and Freddie Knew the Risks

This article in the Washington Post reveals emails that show analysts at Fannie Mae and Freddie Mac knew of the risk associated with subprime and Alt A loans, but that top officials refused to get out of this market. Fear of being irrelevant in the mortgage market drove their decision apparently.

The chief credit officer of Fannie Mae

warned that securities backed by these loans might not be as safe as they seemed. Fannie reported them as carrying the top grade given by credit-rating agencies, AAA, but Marzol cast doubt on that. "Although we invest almost exclusively in AAA rated securities, there is concern that rating agencies may not be properly assessing the risk in these securities," he wrote.

Despite these concerns, Fannie continued to push into this new market. A business presentation in 2005 expressed concern that unless it didn't, Fannie could be relegated to a "niche" player in the industry. Mudd later reported in a presentation that Fannie moved into this market "to maintain relevance" with big customers who wanted to do more business with Fannie, including Countrywide, Lehman Brothers, IndyMac and Washington Mutual.

This certainly does not mean that Fannie and Freddie caused the crisis, but it shows the extent to which they played along, and joined the party at the worst possible time.

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