By ROBERT G. WILMERS

Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.

We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.

At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they’d sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.

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By Peter J. Wallison

One thing can be said about the current debate over the administration’s financial regulation plan, or at least Senator Chris Dodd’s version: the debate has sharpened the issues so that Dodd, the Democrats, and the administration can no longer hide behind slogans. If the administration thought that the bill could be passed simply because the American people resent Wall Street and the big banks, they may have guessed wrong. Senate Minority Leader Mitch McConnell has called them on this, and pointed out that the Dodd bill has some troubling provisions. This required Dodd, in a speech yesterday, to defend the provisions of the bill. The fact that he did it with misinformation is really a step forward, considering where the administration and he have been for the last few weeks. Read the rest of this entry »

By Eamon Javers

It turns out that even the former CEO of Fannie Mae thought that his company had an impossible task.

Citing the unique public-private hybrid nature of Fannie and its sister company Freddie Mac, former CEO Daniel Mudd told the Financial Crisis Inquiry Commission on Friday that the demands on the firms — to increase access to housing and to maximize profits — were sometimes in unworkable conflict with each other.

“When prices crashed far beyond the realm of historical experience, it became ‘The Pit and the Pendulum,’ a choice between horrible alternatives,” Mudd said in his prepared testimony.

“I wish I could have maintained the delicate balance of the roles assigned to Fannie Mae, and I am sorry that I could not,” he said.

The two companies have become political lightning rods, with Republicans arguing that efforts by Democrats to push the two entities to extend home lending to more and more people — even to those who may have been unable to pay their mortgages — helped fuel the subprime mortgage boom that ultimately became the trigger for the broader economic collapse in 2008.

The administration is gearing up for an effort to reform Freddie and Fannie, and Treasury Secretary Timothy Geithner has said he thinks the public-private hybrid model is unworkable. But Freddie and Fannie are not addressed in detail in the pending Wall Street reform legislation — something that Republicans have said is a failure of the current bill.

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