Fannie Mae and Freddie Mac bosses made 'reckless bets'
Wednesday 10 December 2008
The chief executives of Fannie Mae and Freddie Mac, the collapsed mortgage finance giants at the centre of the US housing market, repeatedly ignored warnings that they were putting their companies at risk with exotic mortgage investments, a congressional hearing has been told.
Daniel Mudd, of Fannie Mae, and Richard Syron, of Freddie Mac – who both lost their jobs when the companies were taken into conservatorship by the US government in September – were harangued by lawmakers at a hearing on Capitol Hill yesterday, accused of putting the pursuit of their personal bonuses ahead of preserving the stability of their companies.
But the two men pushed the blame back on Congress and on regulators, saying they were under pressure to make more mortgages available to low-income Americans. Mr Mudd said there were conflicts between Fannie Mae's duty to shareholders and its duty to support the housing market.
Henry Waxman, chairman of the House of Representatives oversight committee, which has been investigating the causes of the credit crisis, said executives saw private Wall Street firms making money from lending to riskier borrowers, and pursued market share in defiance of warnings from their risk officers. The housing market downturn has cost both companies $14bn (£9.5bn) in losses this year, forcing the US government to take more than $5trn of their liabilities.
"The CEOs of Fannie and Freddie made reckless bets that led to the downfall of their companies," Mr Waxman said. "Their actions could cost taxpayers hundreds of billions of dollars."
Many politicians, mainly Republicans, blame Fannie and Freddie for helping to inflate the US housing bubble when they started buying sub-prime loans. Executives yesterday, though, denied that suggestion, saying that Wall Street's demand for risky loans was already inflating the bubble.
The pair were very profitable private companies, but they operated with an explicit government mandate to buy and sell mortgages. That mandate came with an implicit government guarantee, which meant that their bonds were seen to be as safe as US Treasuries, giving them access to cheap borrowing.
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