FANNIE MAE and Freddie Mac collapsed into the costliest bailout of the financial crisis because they nurtured impossible internal conflicts. The two government-chartered mortgage companies grew reckless and greedy during the run-up to the housing bust. They swallowed billions in toxic mortgage instruments as they chased profits for their private investors. The chase destroyed them.
Several years and $187 billion in taxpayer-funded bailouts later, America’s housing market is reemerging, and so are Fannie and Freddie. The two government-owned firms are profitable again, and Wall Street is trying to sink its hooks back into the mortgage companies. The opening is there, because Congress has punted away any plans for putting Fannie and Freddie out of business. And if the current Wall Street gambit succeeds, it could reestablish the same dynamic that helped ruin the companies in the first place.