Former Fannie Mae Execs: Blame the Business Model

“The man who can smile when things go wrong has thought of someone else he can blame it on.”

-Robert Bloch

Testimony continues today in front of the Financial Crisis Inquiry Commission, which is tasked with finding the origins of the financial crisis.

Former Fannie Mae executives Daniel Mudd (former CEO) and Robert Levin (former chief business officer) are testifying in front the commission today.  Fannie Mae purchases mortgages from lenders and repackages the mortgages into bonds which are in turn sold to other investors. When the housing market melted down the government sponsored enterprises needed to be bailed out to the tune of $126 billion.  Mudd and Levin were both shown the door at Fannie Mae after its seizure by regulators in 2008.  Mudd said “I was the CEO of the company and I accept responsibility for everything that happened on my watch”.

Fannie Mae was under pressure from Congress to promote wider home ownership and was under pressure from its shareholders to make profits.  Mudd testified that promoting home ownership and making profits became increasingly difficult as the mortgage business became more and more competitive. As Fannie Mae’s share of the market decreased, it invested more and more in risky subprime and non-traditional mortgages.  Mudd said that “It became clear that the movement toward nontraditional products was not a fad, but a growing and permanent change in the mortgage marketplace. There was no on momentous decision to enter this market”.

Mudd continued that “By 2006, Fannie Mae was engaged in a continual struggle to balance all of the requirements of the public mission, along with all of the duties owed to the shareholder“.  In short, Mudd blamed the failures at Fannie on the flawed public-private business model.

Armando Falcon, Jr., former director of the Office of Federal Housing Enterprise Oversight, said in previous testimony that the structure of Fannie Mae led to “greed, excessive risk taking, and abuse“. Falcon blasted the GSE: “the companies were not unwitting victims of an economic down cycle or flawed products and services. Their failure was deeply rooted in a culture of arrogance“.

Republicans and democrats are in disagreement as to whether the lion’s share of the blame for the recession falls on Wall Street or on Fannie and Freddie.  The future of lending and banking regulation will depend upon the outcome of these hearings.

It seems very probable to this blogger that Wall Street and the GSEs both bear some culpability for the crisis (along with several other parties).  What do you think?  Let us know in the comments section.