Free All The Devils Are Here: Unmasking the Men Who Bankrupted the World by Joe Nocera, Bethany McLean Page B

time. (Charles Coffin, the first president of General Electric, was number one.) “If turnaround is an art,” wrote Collins of Maxwell, then he “was its Michelangelo.”
    Maxwell had never been one to brag. His speeches always sought to cast Fannie Mae as merely one player among many making housing more affordable, rather than as the company with a dominant position in a critical market. But shortly after his retirement he gave an interview to the
Washington Post
in which he reflected on what he had accomplished. “It would take an event of such cataclysmic proportions as to result in a change of our form of government to put this company under,” he concluded.
    At the time, that statement didn’t seem like much of an exaggeration. The year before, Fannie Mae’s profits had exceeded $1 billion for the first time. Its market value had exploded. And perhaps most important, Fannie, along with Freddie Mac, had a virtual stranglehold over the market for conforming mortgages—a bit of industry jargon that directly reflected the power of the GSEs. Conforming mortgages, after all, were mortgages that conformedto the strict underwriting standards Fannie and Freddie demanded in return for their guarantee. Everyone in the mortgage business who could conform did so. They had little choice.
    Long Beach Mortgage was just four years old when Maxwell retired; the subprime business was still a speck in the ocean. Countrywide was growing by leaps and bounds—not by making subprime loans, but by selling conforming mortgages to Fannie Mae. The vast majority of the nearly 60 million American homeowners were members in good standing of the middle class, with the financial wherewithal to make a down payment and monthly mortgage payments.
    But Fannie Mae was never as invulnerable as it seemed to Maxwell in 1991. The company had enemies on all sides. From one direction, Wall Street was just starting to realize that subprime mortgages might allow them to effectively sidestep the GSEs, thus creating a competitive threat that seemed insignificant at the time but would ultimately prove life-threatening. From another direction, Fannie and Freddie’s half-government/half-corporate structure meant that they were always going to face opposition in Washington—sometimes subterranean, sometimes overt, much of it ideological. Critics on the left felt that Fannie and Freddie weren’t doing enough to help poor people buy homes. Critics on the right believed that the government-sponsored entities had no place in the private housing market, and that they should be forced to live or die competing on an equal basis with Wall Street’s securitizers. Although this criticism ebbed and flowed over the years, it never entirely went away.
    As Fannie Mae became ever more profitable and powerful, it also became more arrogant and high-handed. Yet at the same time, as the criticisms continued, it became increasingly paranoid. And as the sheer amount of money at stake grew exponentially over the ensuing decades, Fannie Mae became more determined than ever to protect both its own special privileges and its bottom line. It made for a lethal stew.

     
    In 1992, the year after Maxwell retired, Congress passed a bill imposing on Fannie and Freddie two things they had never had to deal with before. The first was a regulator, called the Office of Federal Housing Enterprise Oversight, or OFHEO. The second was a clear definition of what had previously been the GSEs’ vague mission to help lower-income Americans buy homes,including specific steps the GSEs were supposed to take to perform that mission. You might think that these two new facts of life would have had the effect of clipping Fannie and Freddie’s wings—maybe even costing them some profits. They did nothing of the sort.
    The main reason was Fannie Mae’s new CEO, a smooth-as-silk longtime Democratic operative named Jim Johnson. A tall, forty-seven-year-old Minnesotan and a graduate of Princeton, Johnson was,