All The Devils Are Here: Unmasking the Men Who Bankrupted the World Read Online Free Page A
Author: Joe Nocera, Bethany McLean
was so-called investment grade) and all the way to D (default). At first, they resisted rating these new bonds, but they eventually came around, as they realized that rating mortgage-backed securities could be a good secondary business, especially as the volume grew. Very quickly, they became an integral part of the process, and so-called structured finance became a key source of profits for the rating agencies.
And the third thing Ranieri and Fink needed in order to make mortgage-backed securities appealing to investors? They needed Fannie Mae and Freddie Mac.
At around the same time Ranieri and Fink were trying to figure out how to make mortgage-backed securities work, Fannie Mae was going broke. It was losing a million dollars a day and “rushing toward a collapse that could have been one of the most disastrous in modern history,” as the
Washington Post
later put it. As interest rates skyrocketed, Fannie found itself in the same kind of dire trouble as many of the thrifts, and for the same reason. Unlike Freddie Mac, which had off-loaded its interest rate risk to investors, Fannie Mae had kept the thirty-year fixed-rate mortgages it bought on its books. Now it was choking on those mortgages. Things got so bad that it had a “months to go” chart measuring how long it could survive if interest rates didn’t decline. It had even devised a plan to call on the Federal Reserve to save it if the banks stopped lending it money.
Two things saved Fannie Mae. First, the banks never did stop lending it money. Why? Because their working assumption was that Fannie Mae’s status as a government-sponsored enterprise, with its central role in making thirty-year mortgages possible for middle-class Americans, meant that the federal government would always be there to bail it out if it ever got into serious trouble. Although there was nothing in the statute privatizing Fannie Mae that stated this explicitly—and Fannie executives would spend decades coyly denying that they had an unspoken government safety net—that’s what everyone believed. Over time, Fannie Mae’s implicit government guarantee, as it came to be called, became a critical source of its power and success.
The second thing that saved Fannie Mae was the arrival, in 1981, of David Maxwell as its new chief executive. Maxwell’s predecessor, a former California Republican congressman named Allan Oakley Hunter, was not particularly astute about business, nor were the people around him. During the Carter administration, when he should have been focusing on the effects of rising interest rates on Fannie’s portfolio, he had instead spent his time feuding with Patricia Harris, Carter’s secretary of Housing and Urban Development.
Like Hunter, Maxwell had once been a Republican. A Philadelphia native, he graduated from Yale, where he was a champion tennis player, and then Harvard, where he studied law, before joining the Nixon administration as general counsel of HUD. When he was approached to run Fannie, he was living in California, running a mortgage insurance company called Ticor Mortgage, and he’d converted to the Democratic Party because he felt that in California that was the only way to have any influence. “I was a businessman,” Maxwell says now. A businessman was exactly what Fannie Mae needed. Jim Johnson, the Democratic power broker who succeeded Maxwell as Fannie’s CEO in the 1990s, would later say that he “stabilized the company as a long-term force in housing finance.” Judy Kennedy, an affordable housing advocate who worked for Freddie Mac as a lobbyist in the late 1980s, puts it more grandly. She calls Maxwell a “transformative figure.”
Maxwell was gracious and charming—the sort of man who sent handwritten notes, opened his office door to all his employees, and took boxes of books with him to read on vacation—but he was also incredibly tough, with blue eyes that could turn steely cold. He did not tolerate mediocrity. He
And the third thing Ranieri and Fink needed in order to make mortgage-backed securities appealing to investors? They needed Fannie Mae and Freddie Mac.
At around the same time Ranieri and Fink were trying to figure out how to make mortgage-backed securities work, Fannie Mae was going broke. It was losing a million dollars a day and “rushing toward a collapse that could have been one of the most disastrous in modern history,” as the
Washington Post
later put it. As interest rates skyrocketed, Fannie found itself in the same kind of dire trouble as many of the thrifts, and for the same reason. Unlike Freddie Mac, which had off-loaded its interest rate risk to investors, Fannie Mae had kept the thirty-year fixed-rate mortgages it bought on its books. Now it was choking on those mortgages. Things got so bad that it had a “months to go” chart measuring how long it could survive if interest rates didn’t decline. It had even devised a plan to call on the Federal Reserve to save it if the banks stopped lending it money.
Two things saved Fannie Mae. First, the banks never did stop lending it money. Why? Because their working assumption was that Fannie Mae’s status as a government-sponsored enterprise, with its central role in making thirty-year mortgages possible for middle-class Americans, meant that the federal government would always be there to bail it out if it ever got into serious trouble. Although there was nothing in the statute privatizing Fannie Mae that stated this explicitly—and Fannie executives would spend decades coyly denying that they had an unspoken government safety net—that’s what everyone believed. Over time, Fannie Mae’s implicit government guarantee, as it came to be called, became a critical source of its power and success.
The second thing that saved Fannie Mae was the arrival, in 1981, of David Maxwell as its new chief executive. Maxwell’s predecessor, a former California Republican congressman named Allan Oakley Hunter, was not particularly astute about business, nor were the people around him. During the Carter administration, when he should have been focusing on the effects of rising interest rates on Fannie’s portfolio, he had instead spent his time feuding with Patricia Harris, Carter’s secretary of Housing and Urban Development.
Like Hunter, Maxwell had once been a Republican. A Philadelphia native, he graduated from Yale, where he was a champion tennis player, and then Harvard, where he studied law, before joining the Nixon administration as general counsel of HUD. When he was approached to run Fannie, he was living in California, running a mortgage insurance company called Ticor Mortgage, and he’d converted to the Democratic Party because he felt that in California that was the only way to have any influence. “I was a businessman,” Maxwell says now. A businessman was exactly what Fannie Mae needed. Jim Johnson, the Democratic power broker who succeeded Maxwell as Fannie’s CEO in the 1990s, would later say that he “stabilized the company as a long-term force in housing finance.” Judy Kennedy, an affordable housing advocate who worked for Freddie Mac as a lobbyist in the late 1980s, puts it more grandly. She calls Maxwell a “transformative figure.”
Maxwell was gracious and charming—the sort of man who sent handwritten notes, opened his office door to all his employees, and took boxes of books with him to read on vacation—but he was also incredibly tough, with blue eyes that could turn steely cold. He did not tolerate mediocrity. He
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