Fannie Mae headquarters stands in Washington, D.C., U.S., on Tuesday, Sept. 8, 2009. Fannie Mae and Freddie Mac, the mortgage-finance companies seized by U.S. regulators a year ago, avoided delisting on the New York Stock Exchange after their shares more than tripled last month. Photographer: Joshua Roberts/Bloomberg

The US government has threatened them with a “bazooka” and decapitation, it has also coddled them and relied on them, it has poured in hundreds of billions of dollars and plundered them for billions more.

They are Fannie Mae and Freddie Mac, the paradoxical institutions that underpin the US mortgage market. Today they are a national embarrassment but they created a national treasure: the 30-year fixed-rate mortgage.

Seven years after a giant government bailout, they remain in state-sponsored “conservatorship”, neither fully nationalised nor private, but continuing to guarantee US mortgages and with $5tn of securities outstanding. Reforming them has turned out to be a quagmire.

In Shaky Ground, Bethany McLean romps through the well-intentioned founding of Fannie and Freddie, via their gradual corruption to the current unhappy limbo, with the government and hedge funds fighting over the scraps in the courts.

Fans of The Smartest Guys in the Room, the account of Enron, co-written by McLean, may be disappointed. That book made good use of the “business book as thriller” style pioneered in Barbarians at the Gate. Shaky Ground is a more modest endeavour — a short primer for anyone needing to get up to speed on the peculiar US mortgage market. That is a shame, as it contains all the ingredients of a thriller to outdo the rise and fall of the Houston energy company.

The Federal National Mortgage Association, aka FNMA, aka Fannie Mae, was created after the Great Depression when about half of homeowners were behind on their mortgage payments and access to credit was hugely uneven. Freddie Mac was born in the 1960s.

Together, they provide insurance to home loans, and buy and securitise them. They were widely seen as state-backed and could therefore issue debt at almost the same rate as government bonds.

Shaky Ground

But as public companies they paid their executives handsomely and spent millions lobbying the government. As Gene Sperling, director of the National Economic Council under President Barack Obama, is quoted: “It really gets kind of sick.”

With mounting losses in 2008, it was Hank Paulson, Treasury secretary under George W Bush, who told the president the companies should be seized: “The first sound they’ll hear is their heads hitting the floor.”

Yet for all the martial talk, the fudge proliferated.

Instead of nationalising the institutions, Paulson took just under 80 per cent of the equity. Any more and he would have had to consolidate their vast debt on the government balance sheet. The Obama administration subsequently changed the terms of the bailout so that all profits went to the Treasury. Hedge funds owning the residual equity have cried foul and sued the government.

McLean deftly steers a sensible course through the competing claims. But the ambiguity on which Fannie and Freddie were founded continues, with politicians too scared to reform them. They backstop the housing market; their debt is owned by foreign states who expect repayment; the 30-year mortgage is too hallowed an invention to risk. The zombies continue to walk.

The reviewer is a writer for the FT’s Lex column

Shaky Ground: The Strange Saga of the US Mortgage Giants, by Bethany McLean, Columbia Global Reports, $12.99

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