Think, in 2003. And they worked. They kept the country in a reasonably prosperous situation. One we dont see now. Guest i think they think the election of 19 2000 should have been thrown into the house of representatives. The Supreme Court majority basically ripped the election out of the constitution and cited it. I think it should have been thrown to the house paid host what chapter house. Host what chapter would you recommend republicans read from this book on jack kemp . Guest that is a good question. Really all you need to do is read the introduction. It is pretty long for an introduction to a book, but it really outlines what kemp did, why he did it, and what his career was like. And if you read another one called supplyside, it will help you. But there are so many others. Jack camp had this really kemp had this really interesting and exciting career. Guest i completely agree with fred. If you read if you read the introduction, i think you will continue reading the book because it does sort of set up and if i do say so myself, i think it is pretty well written. [laughter] host thank you both your time host we are here with Bethany Mclean to talk about her new book shaky ground thanks for being here. First this is something i spend a lot of time thinking about i know of any mae and freddie mac the start by telling us why you wrote the book and why fannie and freddie are seven important. Started to cover fannie in 2004 with the wake of the big accounting scandal. At the time i was shocked to find out that Companies Like this existed. But in this case it was created in the wake of the depression to help make Home Ownership more widely available. To buy of the loans that the lenders have made so then they make more loans. Said the idea was this would foster Home Ownership and this was the beginning of the annie mae with a unique system no other country has a 30 year fixed rate either in most credit that to the existence of a peony and freddie. They have grown to be absolutely eagerness to gather with older guarantee of mortgage related debt. Critical to the functioning of the Financial System that is what makes our lives possible they expect to have a Mortgage Rate quoted to you. In recent history as one of the first to companies to be taken over by the government to be responsible for the financial crisis. And this is how far we have gotten. But the idea there is the Silver Lining with a Global Financial crisis you are riper but the first to companies but then to be bailed out by j. T. Morgan. With that by line of credit from the treasury and when they were taken over the adn said this would be temporary to figure out how to reform the Housing Finance system and here we are seven years later the giant companies are still in the state conservatorship what do we want Housing Finance to be like . And think that is an issue with every american with the mortgage and for every investor because the 5 trillion of securities moved through like water everywhere. With Global Economic ripple effects. To literally no the thing the function of fannie and freddie. I go to my baby or lender to get a mortgage but then what happens then . You go to a lender to get your mortgage. They dont get to keep those anymore. They sell them off. With a great majority are sold off to fannie mae or freddie mac who package them up and sell them off the security to investors around the world. To be any in freddie and at t have to worry about Interest Rates could change but the city and freddie guarantee that. That is what buyers around the world can invested because they dont have to go through to analyze to make sure you will all pay your mortgage. Added means it is a the purchase the home with america and how motorship with the Global Financial issue. So what does have the system in place . Is part of the debate if you got rid of fannie and freddie there is no impact they would continue exactly as it is with private capital. But i want to pause on that point for a second. The fact finney and freddie our government sponsored it is like the empress implicit thing that fannie and freddie could not pay so obviously at is what happened as they went into conservatorship but that system has given americans access to the fixedrate mortgage which is something people around the world dont have that is the total picture of American Life that 80 percent of buyers who buy a homer in the 30year fixedrate mortgage. Host or shorterterm with Interest Rates. With a 10 year mortgage so you as a homeowner dont know what your interestrate share payable be because the rates move it has made a stable instrument talk about the government with this implicit suggestion what did that get home orders before the crisis . To read bad is a good question. It got them a lower rate and the fact that fannie and freddie had the government standing behind them to pass along but it is perceived as safer so it costs less through homeowners that could pave the rates on mortgage there is always how much debt to give to the homeowners . That is part of the financial crisis the private capital fled the market if not for fannie and freddie there were a bad the Mortgage Market and the potential crisis would have been a lot worse. Host you spend time talking about the rise of fannie and freddie to have accumulated political influence in washington. Talk about it how they did that with the opinions and fears as a result . There were always people in the government and academia that said were redoing with a government presence . Would is a government sponsored enterprise . So in response to that to develop real lobbying muscle to have that fannie had the most sophisticated lobbying operation he is ever seen in his entire life. But they did that because they felt the rich people the government trying to kill them. But there is any threat to take the advantages that they have been they became a Formidable Political force. People found themselves on the wrong side may be to read a bigger and more aggressive and powerful of the two they really resented the company the way they behaved jim johnson the Washington Post once called them frankly to be ahead of a windy of dash 0mb with talk of the first president. So there was a lot of resentment around that. The Mortgage Market is one of the biggest in the world. And other players in the Home Ownership market i am not supposed to use the phrase but the Industrial Complex durable sometimes Fractious Alliance of everybody who has a stake in the enterprise of the Mortgage Market. Host yes you talk about their lobbying prowess and a nonprofit was offered a grant and then what happened after that . Guest why this is ironic that one of fannie and freddie responsibilities that was given to them by contrast with dash congress as the quid pro quo is they had to do things for Affordable Housing with the loans that they needed to make. With that, instead cry from those people of the right to to say they dont do enough. The the dont do anything to make them more widely available. Said they are criticized for doing that but the organization was supposed to get a grant only to say there is no more money we will not give it to you. The action the said you can actually be that way. Can you . I remember somebody describing we will cut you up day and throw your body in the river. Guest from the 1990s the Washington Post there was another great irony because penney may sound sweet like a grandmother. Because at that at the time had unparalleled political clout. But it seems part of that resentment how much they sell depended on the government in the first place you are dependent on the guarantee for the Business Model the yet you spend all the money thready and people around washington former treasury secretary said if he would decide a scheme to extort money you could not do a better than this. Basically with the hidden subsidy that there is the implicit guarantee the u. S. Government would stand behind fannie and freddie but they did not pay a fee so it was free money that they could turn around to exploit to have huge lobbying muscle. How do we know that that guarantee was going to homeowners verses the profits . Guest there is an argument that it wasnt. And then use to argue it was 25 basis points in the mortgage payments were 100 of the math was right. Ed is a good and interesting debate but it is irrelevant in the context of 2008 because the value of fannie and freddie isnt. We dont need them in good times that we do in the bad times. So that johnnie a boom decade there were not providing much value but it seems that is a funny way to look at this. Looking get that chance to end a. To safeguard to a big to fail which is exactly what happened president obama of the described the idea that a matter what happens with the executives to be allowed the taxpayers. Host you feel that even today . But then just of todays ago to universally agree to put a new cap on the ceos. Even today. To seem extremely professional is ironic because without them but it has never been more since the financial crisis you think that would have given them some mojo in there is a clear reason for that. It is very popular in a lot of circles that fannie and freddie and the goals that they had were solely responsible for the financial crisis so then to sit there were so the responsible was no problem in the private sector. And then we will all be just fine. Barney freight was the congressman and a defender of theres it even he said they should be abolished. Host this is not there first scandal. There is an interim scandal that its easy to forget because of the financial crisis less than 20 years ago. This is a the first exposure to fannie and freddie with the scandals in 2000 that led to the ouster of all City Management teams of companies. But then the idea that fannie had a complicated statutes to overstate earnings and it was a huge scandal. With the regulator to think how odd that is. Can you imagine . Those are big words but with the mixture of monty python but the odd thing is that when they released the statement of earnings equity went up, not down. And despite the rhetoric in never charged by the Justice Department priority for sec staying there is absolutely no evidence that he did anything wrong you would expect when they called the ended with no little whimper. Host white you think that the government played that out . It was deepseated bigger since the they were abusing deposition they were a huge danger to the Financial System fifth event with that political clout. In to see him frustrated with the ability that the two companies were a system aggressed. And then it became ugly on both sides. After the management teams for at the beginning of the biggest bubble in History Congress still could not pass any new legislation for free in freddie. Is popular to say they have democratic problems but we had a republican and in charge of the white house and even in congress and still did not pass legislation explaining where we are now. Then we talk about what these companies do. Unless the you give that very blanket. Ry blanket. Here is a story of the housing boom. To say they did not go as far as a private lenders. Day definitely contributed to the bubble that definitely contributed to the problem but it isnt the full cause. But the market share was cut in half to sell them to phidias and radio that is what the problem is it was becoming riskier and riskier. So around 2005 he started to do by the wall street securities for their own portfolios and then decided that you can trace that through market share numbers come in the executive presentation say and they were terrified they were losing there will of the market so they began to guarantee riskier loans. See you concede there were never as risky as the private sector but with the default rate of the back to lowes purses wall street was a fraction of the default rate. But the total contributors to the crisis. That people also allege not just fannie and freddie but the Affordable Housing goals so where did you come down on that research . It was in order to increase the market share. And you can see that with the executive presentation at the time. So you can be simplistic and the other was both. Whose job was that . T ted was regulated to have a Government Agency the office of federal housing to regulate fannie and freddie that was their entire job. But they did not think twice about it. Was the staffing or political issue . It was a confidence issue i say that the but they are incompetent but if we make these loans and investors were buying the securities then to analyze the risk to pay the loan back the be realized that all went to hell in a handbasket but in fact, we both could not pay the loan back. That is the biggest irony one of the things that brought the baby and freddie down that they started to buy the of wall street manufacture its securities so when it started to lose the value they had to take lose its value. And then was packaged and sold to investors that has to be one of the more screwed up the reins. [laughter] but then they with pack the products so then they tried to satisfy their housing goals. There was an uh misperception it was almost intellectually dishonest that is what caused the crisis but the majority of risky loans that was packaged were not made for the purpose is of Home Ownership doublea2 cash out somebody takes out the mortgage and takes the cash to pay down the other dead or go on vacation but if you did not make those loans then there would not have been a financial crisis proposal was the referendum on homeownership with the idea we should never extend credit to to be qualified for homeownership because and then to have the Academic Work done actually the borrowers did not pay their cash shot refinancing. Sue was like extending credit to people that cannot pay back and then there was credit to borrowers every level. There have been entire books written that blame fannie and freddie. So why was this a cause . It was a clear way with the complex issues. If you consider the government caused the freddie joe crisis you have a clear explanation that is just part of the of appeal part of it is the regulation of you can save peony in freddie and the government did this but you could say we dont need any more regulation we dont believe that is secured to all the problems im actually quite mixed on regulation but if you think that we could get rid of dodd frank. Then on top of that to never have it in a the of the Housing Market. With the enormous demand of currency if you spend time to think about it. Since 2008, a when does it become apparent there were Serious Problems at fannie and freddie . And what had happened had the government not . Lenovo of i can answer that better relates to the idea that fannie and freddie cause the financial crisis because of the loans that were backed by them and categorically and that is an alltime highs. With the french Money Market Fund could not pay because of the losses on the west of prime mortgages with mortgagebacked securities nothing to do with fannie and freddie. Than the giant winter called me and said they went bankrupt before there were travers. But the year went on law and a and it wasnt a big conflagration. Is and as 2008 went on people were increasingly worried because you conceded had those mortgages on their books with a giant housing downturn going on those whose sole business is to take the credit of the voters will have a problem. Even if they havent ventured into buying risky mortgages. The stock prices were plummeting and there was great fear they could not raise markets and is fascinating because we think it is a good thing but the treasury secretary tells the great story of the beijing olympics and then it goes back to the securities with the global e economy. And then to say that it is the end of the global when mitchell system. So the idea that if these two companies were to go dash of the securities were ever. 05 so global reactions that are rather of Balance Sheets so there is a perception. It is interesting and then to think they will fail if those consequences are sara dyer but you would rather act and be wrong. It is subterranean despite where they were. I tended to cut the government to a little bit of slack for what they did. It is easy to look back. So i tend to think those arguments about what happened are about beside the point. Added the caveat. The way they put them into conservatorship is the genesis that is screwed up right now. So they use a process called the conservatorship. Guest back at is how the fdic saved the failing banks it is in the law to govern fannie and freddie and that was lifted from, so was and that my idea was anything new but a couple of really weird the miss and one is the terms of the bailout were so much easier than the big banks eddie even aig is back to so to my normal but executives did not get fired their back to paying the shareholders. But the uniquely iran there has been in the argument that conservatorship is to rehabilitate and to put them back up there. Reduce not a license to steal. Host there is that was passed to four different infrastructures than people thought they were familiar and that was the stock 2. Two receivership . When they bailed out to it isnt like they took away the publicly traded shares shares, so what exactly did they leave behind . Guest that is of a game. That is of a game. The government left them 20 of the securities. These were never supposed to have any value with the 10 revenue and then david be paid that and that government took seven and ninepoint 9 but at the time they ever meant did it fear in the hand freddie action said their movie of values someday. Host when . The mcfadyen know if it wasnt david ticked. So i have heard arguments from people and the government we only did that because we had to we didnt want to put it more debt on the Balance Sheet so the shareholders should know you were wiped out you should know better even though that isnt what we said at the time. For a period of time they were wiped out. But they still traded. Some investors started to do though werke inserted with one hand its 81 dash 187 with that is part of a cent but in truth the companys did not lose that much money on a cash basis but they had to draw up the money anyway. So they begin to do the work tuesday and some point they will have to reverse these losses the what do we do with companies that have gotten into trouble . Is that theyre just having you pay us we is thatt having you pay us we will take almost every but then there would take everything they happened to make if they made money or if they lost money they would give us some. But that was like if i had to pay a dollar of interest every pay say you say but when you do i will take the all. Host mesh to the is to structure that it comes back but then as you get smaller. It is a lot of the death of seven. Router women we want to sell of the syrian but didnt 2012 the there are some of red flags and then to become profitable bet but dated and though dash but they did not. That is strange so i am in the camp unless there was Something Else that we dont know what it was but this did not seem to make sense. And a student i guess that is possible but it is hard to believe and. But it is totally possible because that is the and speesix so you think there is a vivid said profits talking about the early to dozens that where people were afraid of. Theres still this kind of anti health where the investors get rich and it is not written. Were talking about the hedge funds that youre seen on tv all the time. Were talking about pulsing company, about the square, a Hedge Fund Manager and mutual fund manager who is a very popular retail fund and a lot of people on that fund. Some of these funds analyze the legal case after they start sharing profits. Right you have a little less intrinsic sympathy for that. The ones ones who bought before the government changed its mind how are we to know. Afterwards what people say though, i think it is a fair point is that look, this is wrong. You cant do this. This is america. Its not where. Its not where system is supposed to work. That a great line in the work its like i put 80 of your house in the financial crisis and you came back and started pain and i said no im going to take hundred . Rate. Another great line i love in the book came from an executive and he said well it feels anti american, then again their people that would argue that his antiamerican. Do you feel like the involvement of the hedge fund has complicated this issue . I think it has definitely, located the issue. I think its a good thing for a couple of reasons but it has complicated the issue. It is meant that you have very powerful, wealthiest people in funds in the nation in their suing the u. S. Government, fighting for an outcome that is not what the administration has said it wants. The investors had very much push were not just that we want to get paid but we want freddie and fannie back. That is what at the administration is that we do not want. Obama has said and been clear that we do not want freddie and fannie and they have to go. It has complicated matters. Its a good thing for a few reasons. I dont think we want the government to have a free hand hand to make decisions behind closed doors. This is an issue that affects every america it in some way or another. It affects the Interest Rate on your mortgage, the ability of mortgage credit the of value of your house, i dont know that we want the government making a decision behind closed door that will affect everybody without some sort of public debate about it. That is one of the big reasons i wrote the book. I also think what happens in 2012 the government was for, what they said was perfectly right. Is it good to have transparency and who can afford to sue the u. S. Government. Lets make sure that what you did was above board. Im a believer and more transparency and so i come to believe the investors while there after their own payday, they are also raising awareness of the situation in a way that is probably good. One of the great frustrations of the court cases so far is there going through a discovery process but what they have discovered isnt available to the public, at least yet. Its not even available to the hedge funds with the lawyers and people who are underneath. The plaintiff up turning appear to be very confident in their filing that the government lied. Every filing will go something like, such and such Government Official said acts but because of but thats clearly not the case. And as he said if all you have as a plaintiffs attorney, you have the government side, but if all you have is the plaintiff side its a worse reflection of the documents coming out. A judge just recently decided for the time being you have these documents are going to be made public. So this came up in another talk you gave a few days agos, some of the hedge funds which dont want the litigation to go all of the way to the Supreme Court their investment return can look positive and hoping the government will decide to settle. One of the ideas that if we can make this discovery public then it will be so embarrassing or the threat of it will be so embarrassed and i will go for settlement. What to think of think of that strategy . I dont like that is an answer because i want transparency. I want to know the government was thinking when they did the third amendment and to take all of the profits. I dont like the idea possible government misbehavior crouched or uncovered because they can have a settlement. Its anti transparency. That said, one of my fears of where we are today is that there will be a next terminal shock like victory in the lawsuit for the hedge fund or like an incredibly embarrassing document the government doesnt want to become public so they will settle with investors. Or therell be a shock to force freddie and fannie to go back to the treasury and take more money and then it will be a huge political football again. Instead of making a well thought out decision about what structured the Mortgage Market could look like, we are going to lurch into some sort of halfbaked answer. Just in order to avoid discovery or avoid that the loss over these two companies. Thats a frightening process. So the Obama Administration has been adamant that they Want Congress to sell this, are we getting anywhere without. The Obama Administration has been more pointed than that i think. So correct me if im wrong, they been clear they want freddie and fannie gone. Obama even said in a speech in phoenix a few years ago, had to entails i lose, one of these companies have got to go. They have been insistent that they want private capital to finance the American Mortgage market. So we have this disconnect going on and tell me if you sense the same thing but i think there is a widespread acceptance that if it were not for some sort of governmentbacked Housing Market that American Life, the 30 year year fixed rate would not be there. Its really would be there for most of the population in all Economic Times. It may may be there for the very wealthy, or from our people when Economic Times are very good but it would not be the picture of American Life as we know it. I think there is an acceptance that we dont want to pull the plug in the Housing Market, yet there is this anti frantic franny and freddie. There is a bill in the spring of 2014, there is an argument that bill recreated franny and freddie. If you have a backstop why not reform ranney and freddie. Give them better regulation, make sure their incentives are not to produce extraordinaire profits for their shareholders and executives but rather run the business safely, may be even toss in some markets and have them pull back from the Mortgage Market. But why would you try to fix what you have instead of starting from scratch with a totally untested system that is going to support the most import asset and American Life. What you feel like should be happening right now question mark. Im somewhat torn on this. A part of me have always disliked the homeownership even though spent in our society from the beginning. I felt like we needed to do a larger rethink about this notion and how we finance Home Ownership. The larger rethink if youre doing a cash out refinancing should that be treated just like if youre buying a home. If we are are encouraging Home Ownership why are we encouraging people to trade their home for credit card. Why does our system of law, tax laws and mortgage credit enable both equally. Should we do this larger rethink . Im not sure were going to do that. I started to believe i would rather see a reform of franny and freddie with much tighter regulation and may be structured like a utility. With an acceptable rate of return and instead of make whatever you can and get rich structure. Ive use this line but franny and freddie are the worst worst possible system until you consider all the alternatives. Then he think theyre not so bad. So i guess i become an advocate of fixing what we have while recognizing that it is not perfect. There are dangers in that system. There are dangers in every system. Another side of lost dichotomy hears if you have big banks financing without private capital. Franny and freddie have to be bailed out by the government so the big bank. So if we fix that now with a hefty finance reform, if the big banks control the Mortgage Market dont think they would have be bailed out . They could undo everything that has been done. Putting mortgage mortgage risk in the banking system. So if we let franny and freddie start to build capital again, we release into the market with regulations, do you feel like there is any risk that we just send out 20 years from now in the financial crisis . Huge risk. With the financing of homeownership as we saw the 1990s comes comes with the ability to build a huge Political Base in was