Little Orphan Fannie Mae -- Review & Outlook -- The Wall Street Journal

The government assault on J.P Morgan Chase is an injustice for many reasons, but the case has now reached tragicomic heights with the bank's agreement on Friday to pay $5.1 billion for supposedly conning Fannie Mae and Freddie Mac. So the government-favored mortgage giants that did as much as anyone to foment the housing bubble and bust are now presented as victims.

The premise of the allegations settled on Friday is that while it may appear that Fan and Fred were recklessly gambling on the housing market for years before the crisis, they were duped by Morgan and other banks into buying risky mortgage-backed securities that they did not understand. This is the Little Orphan Fannie defense. 

Even the partisan Financial Crisis Inquiry Commission, created by the 2009 Pelosi Congress and chaired by a former state Democratic Party chairman, didn't try to sell that line. As much as the Democratic majority on the panel wanted to absolve Washington of its role in creating the crisis, it had to give the two government-created mortgage monsters their due. The committee's report dubbed Fannie and Freddie the "kings of leverage" and described all of the ways they avoided oversight while relaxing underwriting standards and raising their bets on subprime mortgages.

The two companies, which profited from an implicit government guarantee, owned or guaranteed $5 trillion of mortgage assets. Sometimes they bought home loans and bundled them into securities for sale to other investors, and sometimes they bought securities that others had assembled. They were the biggest buyers of subprime bundles during the housing boom, and their lust for those bundles fed the subprime machines at Countrywide (later bought by Bank of America) and Washington Mutual (bought at federal request by J.P. Morgan.

 After it all fell apart, the only debate was whether the twin disasters at Fan and Fred were primarily the result of federal "affordable housing goals" or executives' desire for bigger profits and bonuses. Being Democrats, the commission majority settled on greed as the principal problem at Fan and Fred, but nobody concluded that they were victims.

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