Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Whether it was legal or wise, rescuing investment banks by means of obscure balance sheet transactions was a technical business that could be kept out of the political headlines. That changed with Fannie Mae and Freddie Mac. As the indispensable government-sponsored backdrop to the American housing market, they were at the center of one of the most formidable political networks in Washington. By the summer of 2008, with private securitization stalled, they were also responsible for backstopping 75 percent of new mortgages in the United States. The vast bulk of the Fannie Mae and Freddie Mac balance sheet consisted of top-quality conforming mortgages. If they had had conventional balance sheets, they ought to have been able to ride out the storm. The problem was they did not. In June 2008 Fannie Mae and Freddie Mac held MBS valued at $1.8 trillion and guaranteed another $3.7 trillion on the basis of shareholder equity, which in the case of Fannie Mae came to only $41.2 billion, and in the case of Freddie Mac, to $12.9 billion.18 It was a leverage ratio that would have made even the boldest investment banker blush. It was conceivable only because Fannie Mae and Freddie Mac were government-sponsored enterprises. In the summer of 2008 the meaning of that term was going to be put to the test. Allowing for only minimal losses, the capital of both Fannie Mae and Freddie Mac would be completely wiped out. If they folded they would take down the last remaining lenders in the mortga...