ter August as competitors dropped out and prices o loans and securities ell.Lund told FCIC sta that ater the liquidity shock, Fannie had “more comortthat the relationship between risk and price was correct.”
Robert Levin, the com-pany’s chie business ofcer, recalled, “It was a good time to buy.”
On August , OFHEO’s Lockhart notied Fannie that increasing the portoliocap would be “premature” but the regulator would keep the request under “activeconsideration.” Lockhart wrote that he would not authorize changes, because Fanniecould still guarantee mortgages even i it couldn’t buy them and because Fannie re-mained a “signicant supervisory concern.” In addition, Lockhart noted that Fanniecould not prudently address the problems in the subprime and Alt-A mortgage mar-ket, and the company’s charter did not permit it to address problems in the marketor jumbo loans (mortgages larger than the GSEs’ loan limit).
Although there hadbeen progress in dealing with the accounting and internal control deciencies, he ob-served, much work remained. Fannie still had not led nancial statements or or , “a particularly troubling issue in unsettled markets.”
As Lockhart testied to the FCIC, “It became clear by August that the tur-moil was too big or the Enterprises [the GSEs] to solve in a sae and sound manner.”He was worried that ewer controls would mean more losses. “They were ulllingtheir mission,” Lockhart told the FCIC, “but they had no power to do more in a saeand sound manner. I their mission is to provide stability and lessen market turmoil,there was nothing in their capital structure” that would allow them to do so.
Lockhart had worried about the nancial stability o the two GSEs and aboutOFHEO’s ability to regulate the behemoths rom the day he became director in May , and he advocated or more regulatory powers or his largely toothless agency.Lockhart pushed or the power to increase capital requirements and to limit growth,and he sought authority over mission goals set by the Department o Housing andUrban Development, as well as litigation authority independent o the Department o Justice. His shopping list also included the authority to put Fannie and Freddie intoreceivership, a power held by bank regulators over banks, and to liquidate the GSEs i necessary. As it stood, OFHEO had the authority to place the GSEs in conservator-ship—in eect, to orce a government takeover—but because it lacked unding to op-erate the GSEs as conservator, that authority was impracticable. The GSEs woulddeteriorate even urther beore Lockhart secured the powers he sought.
“THE ONLY GAME IN TOWN”
But Fannie and Freddie were “the only game in town” once the housing market driedup in the summer o , Paulson told the FCIC. And by the spring o , “[theGSEs,] more than anyone, were the engine we needed to get through the problem.”
Few doubted Fannie and Freddie were needed to support the struggling housingmarket. The question was how to do so saely.
Purchasing and guaranteeing risky mortgage-backed securities helped make money available or borrowers, but it couldalso result in urther losses or the two huge companies later on. “There’s a real trade-o,” Lockhart said in late —a trade-o made all the more difcult by the state o