Freddie Mac and Fannie Mae have been two of the largest decried recipients of the bailout. Their previous status as Government Sponsored Enterprises (GSE) created the appearance of sound financial institutions; they have since been reduced to conservatorship.  

 

David Wessell, in his book, “In Fed We Trust: Ben Bernanke’s War on the Great Panic,” does a fantastic job of discussing the financial crisis and devotes an entire chapter to Freddie Mac and Fannie Mae. As early as April 15, 2008 the government was discussing the contingency plans for the collapse of the subprime lending market, but were not considering Freddie Mac or Fannie Mae (which were presumed safe).  

 

As early July 2008 approached, Bernanke and Paulson were speaking before Congress asking for tighter regulation of the housing giants, but still were not asking for money. By July 10, however, the Board of Governors of the Federal Reserve Chairman Ben Bernanke and Department of Treasury Secretary Hank Paulson determined that the GSEs did need assistance. Shortly after such determination, a conservatorship was created in which the US government committed $1,450 billion; a sizeable sum of the entire bailout.  

 

On October 22, 2008, members of Congress sent the Federal Housing Finance Agency (FHFA) director, James B. Lockhart II, a letter asking for a “review” of the “agencies’ charitable activities” to prevent the scenario in which “A loss of these contributions, or a significant diminution, could have devastating consequences for thousands of families.” In a September 9 email, David Pearl at FHFA confirmed that “the conservator will review all planned contributions.” Meanwhile, Director Lockhart outlined capital concerns stating “OFHEO [Office of Federal Housing Enterprise Oversight] believes that there are many safety and soundness concerns at Freddie Mac, but the critical concern is capital.”  

 

Despite having a bad business model, government officials’ biggest concern was still money outflow rather than actual money inflow (Business 101: In order to lend or even donate money, the organization has to actually have it). Essentially, the government viewed these lending agencies not as businesses but as welfare subsidizers.    

 

 

The regulators were not concerned in 2007 when individuals testified before Congress on the soundness of the beloved GSEs. Government officials chose not to act when questions were raised about oversight, lack of audits, and sketchy bookkeeping. Even subprime lending was not thought a problem in early 2008, but when the subsidies and easy money were in danger, the government acted. Under capitalism, when an organization lacks capital and is unsound, it closes; but in this case, the regulators “reviewed” contributions and further formalized a dangerous business model.