Pressured to Take More Risk, Fannie Hit a Tipping Point

Fannie Mae's CEO:

Fannie Mae faced the danger that the market would pass us by. We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.

Seems to be more a problem with the judegment of and decisions made by Fannie Mae executives, and less of a government induced one.

But at that meeting, Mr. Mozilo, a butcher’s son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans.

Yup, again.

I'm not trying to defend the federal government here. I'm just trying to reply to all the right-wing scapegoating of the government -- to me a Red Herring to turn our attention from the real culprit: Wall Street greed left to run free (and wreak havoc) by right-wing free-market worshippers and politicians in Wall Street's pockets:

Investors were also pressuring Mr. Mudd to take greater risks.

On one occasion, a hedge fund manager telephoned a senior Fannie executive to complain that the company was not taking enough gambles in chasing profits.

“Are you stupid or blind?” the investor roared, according to someone who heard the call, but requested anonymity. “Your job is to make me money!”

Okay, here's a finger pointing at Democrat politicians:

Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed , a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”

But Fannie’s computer systems could not fully analyze many of the risky loans that customers, investors and lawmakers wanted Mr. Mudd to buy. Many of them — like balloon-rate mortgages or mortgages that did not require paperwork — were so new that dangerous bets could not be identified, according to company executives.

But even here it is a weak finger. Fannie Mae execs had a fudiciary responsibility to push back, or say it wasn't possible, or charge more for taking the riskier loans.  Note that these risky loans weren't even being made by Fannie Mae, but insured by it. Also not that other lenders completely independent of the government were buying these loans:

...no company, no matter how large, was strong enough to withstand the losses stemming from troubled loans.

Within weeks, Lehman Brothers was forced to declare bankruptcy, Merrill Lynch was pushed into the arms of Bank of America , and the government stepped in to bail out the insurance giant the American International Group .

Yes, absolutely the federal government shares responsibility for the crisis.  But did government encouragement to make mortgages more accessible actually force lenders to make unscrupulous loans? Or was the real government failure its deciding that oversight was bad, that an unfettered free market magically turns greed into utopia for all?