The lingering policy issues from the financial crisis can be divided into two major categories: those that Congress has addressed through the Dodd-Frank Act (I believe most of the law’s provisions were unsatisfying, to say the least) and those that were not addressed at all. Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that dominate the mortgage industry, fall into the latter category.

In her new book Shaky Ground, financial journalist and former Goldman Sachs analyst Bethany McLean tackles that most intractable of policy issues: what should we do with the two GSEs, which the government took control of in September 2008. She makes a commitment in the book’s preface: “What I’ve tried to do in this book is to lay out the facts in a way that I hope will help readers think about the issues and make up their own minds. This is too important to let special interests determine the outcome while we play possum.”

I have closely followed the saga of Fannie and Freddie since I wrote a paper on them for the Cato Institute in 1997 (“The Mounting Case for Privatizing Fannie Mae and Freddie Mac,” Policy Analysis no. 293). I was hopeful based on this initial passage and her history that McLean would bring to the table a balanced, fact-based, and measured analysis of a topic that usually is discussed at a volume “up to 11,” to borrow from Nigel Tufnel.

McLean has developed a reputation as a fair arbiter of financial policy matters. She has two previous financial policy books to her name: The Smartest Guys in the Room (Portfolio, 2003; co-authored with Peter Elkind), which tells the tale of the fall of Enron, and All the Devils Are Here (Portfolio, 2011; co-authored with Joe Nocera), which traces the history of the mortgage industry in the lead-up to the financial crisis of 2007–2009. The latter does an excellent job of weaving together an interesting history of the industry and the policy push for increased homeownership, although I didn’t always agree with its policy implications. For the most part, McLean and Nocera got the history right.

Leading the reader / In her preface to the new book, McLean calls Fannie and Freddie “two of the villains” in the run-up to the financial crisis. In one of her introductory chapters, she carefully and rightly lays some blame for the crisis on the pair, albeit not particularly forcefully:

There is truth to the broad argument that government housing policies, of which [Fannie and Freddie] were one instrument, helped cause the crisis. The government did push for weaker lending standards, and Fannie and Freddie certainly helped facilitate that. And there is an argument that Fannie and Freddie helped blow the bubble bigger than it otherwise would have been.

So far so good.

But then she gets sidetracked, dedicating most of her third chapter, titled “The Blame Game,” to an attack on American Enterprise Institute scholar Peter Wallison, who has been criticizing Fannie and Freddie since the 1990s. He was one of the few people back then warning against the increasing influence (political and financial) of the GSEs and the risks they posed to the financial system.

One would think McLean would recognize Wallison as a lonely voice whose early warnings turned out to be prescient, but no. In the early stages of the chapter she recounts a snarky comment from one of his detractors: “Everyone agrees that there is simply no way to make Peter happy.” After that unhelpful quote, she commits the rest of the chapter to deriding what she calls “Wallison’s narrative.” The back-and-forth in this chapter really is unnecessary and her approach of “leading the witness” (readers) to conclusions about Wallison’s theories about the financial crisis gets away from her objective to simply “lay out the facts” and let readers make up their own minds.

In this same chapter McLean further tries to convince the reader that Fannie and Freddie’s purchased loans were not that risky, notwithstanding the fact that she acknowledges that those loans put the pair on the brink of insolvency. She also claims that subprime lending was “never truly about homeownership,” notwithstanding the fact that as subprime lending took hold, the homeownership rate spiked to nearly 70 percent.

Part Two of the book, which recounts the history of the two GSEs from the 1930s to the early 2000s, really does not add much new information to the public store of knowledge on Fannie and Freddie. Many of the same facts are recounted in All the Devils Are Here or in another book that McLean cites throughout Shaky Ground, The Mortgage Wars (McGraw-Hill, 2013), authored by former Fannie Mae chief financial officer Tim Howard. If a reader has followed the mortgage market and its history over the past decade, this material will simply be a review. This summary approach would be alright in most cases, but Shaky Ground is a relatively compact book and by this point McLean has burned through nearly two-thirds of its pages without getting into the nitty gritty of the policy update on Fannie and Freddie since the government takeover, reserved for Part Three of the book.

Winding down (or not) / In this final part of the book, labeled “Limbo,” which is how the status of Fannie and Freddie has been described by many observers (myself included), McLean embarks on whirlwind coverage of:

  • The contrasting and lurching leadership parade at the Federal Housing Finance Agency, which acts as conservator for Fannie and Freddie. First, Ed DeMarco tried to reduce the pair’s footprint on the industry and protect taxpayers. Then DeMarco’s successor, Melvin Watt, began moving the GSEs back to the status quo, as explained in a quote in the book by Cato’s Mark Calabria.
  • The dysfunctional signals emitted from the political world about what to do with Fannie and Freddie. This is best epitomized by the fact that the major financial reform effort since the crisis, Dodd-Frank, did nothing to resolve the “limbo.” Adding to the mess has been the conflicting signals from the Obama administration that on the one hand indicate the White House wants to “ultimately wind down” the pair, but on the other hand show a desire for maintaining a government role in the housing market to mitigate the next downturn.
  • In a chapter notably called “Mr. Hedge Fund Goes to Washington,” McLean explains how hedge funders came to invest in Fannie and Freddie after they were placed in government conservatorship, how Treasury ended up “taking” all the underlying value in the pair through a profit sweep, and the litigation that predictably ensued. Trust me, this is the best I can explain this legal morass in a 1,500 word book review.
  • Corker-Warner, the legislative plan that “would have killed Fannie and Freddie” once and for all, but because the stakeholders in housing reform are so splintered, it can only boast a plurality of support.

To me there are some hot topics that would have made for even more interesting reading had McLean included them in this third part. Foremost among them is a building controversy over whether Fannie Mae and Freddie Mac were insolvent when they were taken over and placed into conservatorship by the government, and whether the takeover was even justified. Looking into this topic would have required some good investigative reporting combined with a few well-placed Freedom of Information Act requests to try to determine what information the government had on the solvency of Fannie and Freddie, and whether it was reasonable to place them in conservatorship based on that information. McLean enters a theoretical discussion of the GSEs’ “net worth,” but ultimately bypasses the topic of solvency, explaining in a C‑SPAN interview with the Wall Street Journal’s Joe Light that “I tend to cut the government a little slack” on such matters. That’s not a particularly satisfying outcome for those readers interested in questioning the whole basis for government intervention in the Fannie and Freddie case.

Conclusion / In the final chapter, McLean begrudgingly throws up her arms and pledges her support for the idea of reanimating Fannie and Freddie: “better the devil you sort of know.” According to her logic, this will be done with a Fannie and Freddie with “much higher capital levels, more competent regulation [whatever that means], maybe an explicit guarantee for which they pay the government, and no portfolio business.” The only problem with her logic is that it bears a striking resemblance to what we had in the bygone years of Fannie and Freddie, but that business model slowly evolved into the “toxic twins” through the political power of the housing industrial complex. Based on that history, the wild hope that this optimistic scenario can ultimately unfold is not intellectually defensible.

In looking at what she perceives as the benefits of Fannie and Freddie, McLean never explains why she believes that government should ensure a wide availability of 30-year mortgages. That is especially troubling given that so much of the benefit of the government backstopping of Fannie and Freddie flows to upper-middle-income and high-income homeowners (myself included). She also does not explain why we should keep in place this duopoly pair of enterprises given the systemic risk this distorted market structure presents.

For readers who have followed the soap opera of Fannie and Freddie since well before the financial crisis, much of this book will be review and largely a disappointment. For those less schooled in the arcane nature of the pair, the middle chapters will be a useful tutorial in how not to structure U.S. housing policy going forward. We should not make the same mistakes over and over again.