Mark Calabria

Recent actions against Fannie Mae and Freddie Mac by the Securities and Exchange Commission (SEC) also produced the standard reaction by GSE apologists. The New York Times’ Joe Nocera was quick to denounce the SEC, arguing that Fannie and Freddie were late to subprime. While I agree that the SEC case is likely a weak one, that, however, is for the opposite reason than Joe supposes.


The reason the case is weak is that anyone with half a brain could read Fannie’s financial disclosures and determine they were doing subprime. Contra to Joe’s false claim that  “Fannie and Freddie got into subprime mortgages, with great trepidation, only in 2005 and 2006,” the companies were both clear before then that they were involved in subprime. Since fact-checking doesn’t seem to be very important with Joe, you can start with my analysis.

The disagreements between Nocera and AEI’s Peter Wallison focus on the GSEs’ mandated housing goals. This is unfortunate and, even more importantly, besides the point. While I find the evidence that the housing goals helped to increase GSE credit risk convincing, I would be the first to say that such evidence is far from conclusive. But so what. Being leveraged over 200-to-1, as was the GSE guarantee business, is a recipe for disaster regardless of credit quality. As even Democrat Phil Angelides admits in today’s WSJ, Fannie and Freddie “had a flawed business model in which profits were privatized and losses socialized.”  That’s the real problem. If Nocera wants to argue that Fannie Mae was no worse than Bear Stearns, then I can live with that as long as we also apply the fate of Bear to Fannie. 

Mark Calabria

Mark A. Calabria, is director of financial regulation studies at the Cato Institute.