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 markets and used them to buy mortgages from lenders. For many years it toiled quietly in this routine business.
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