Magazine November 3, 2008, Issue

Worse Than You Think

(Carlo Allegri/Reuters)
What went wrong at Fannie and Freddie — and what still might

The government’s takeover of Fannie Mae and Freddie Mac in the middle of a presidential race — coupled with the fact that their activities contributed significantly to the current financial crisis — has brought these “government-sponsored enterprises” (GSEs) into unusual prominence. One of the principal elements of the story is its similarity to the savings-and-loan (S&L) collapse of only 20 years ago, and the failure of Congress to understand and apply the lessons of that debacle. 

Fannie began life as a government agency, commissioned to add liquidity to the housing-finance system. To perform this function, it borrowed funds in the capital

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