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Dimon Calls Fannie, Freddie ‘Biggest Disasters’ Ever

Washington-based Fannie Mae and Freddie Mac, in McLean, Virginia, have taken more than $150 billion in federal aid since regulators seized their operations in September 2008. Photographer: Andrew Harrer/Bloomberg
Washington-based Fannie Mae and Freddie Mac, in McLean, Virginia, have taken more than $150 billion in federal aid since regulators seized their operations in September 2008. Photographer: Andrew Harrer/Bloomberg

Feb. 11 (Bloomberg) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said government-sponsored mortgage companies Fannie Mae and Freddie Mac were “the biggest disasters of all time” and a leading cause of the U.S. financial crisis.

“That one was an accident waiting to happen,” Dimon said in an Oct. 20, 2010, interview with the Financial Crisis Inquiry Commission. The congressional panel yesterday released audio files of interviews gathered during its 18-month investigation into the causes of the crisis.

U.S. Treasury Secretary Timothy F. Geithner recommended gradually winding down Fannie Mae and Freddie Mac in a proposal sent to Congress today. The Obama administration is trying to end taxpayer support for the companies and wean the $11 trillion mortgage market from its dependence on the government. Washington-based Fannie Mae and Freddie Mac, in McLean, Virginia, have taken more than $150 billion in federal aid since regulators seized their operations in September 2008.

“We all knew about it, we all worried about it, no one did anything about it,” Dimon, 54, told investigators. New York-based JPMorgan is the second-biggest U.S. lender by assets behind Bank of America Corp.

Subprime Lending

Fannie Mae and Freddie Mac, which were privately owned by shareholders, received federal tax breaks and other subsidies to help fulfill their public mission to bolster the U.S. housing market. Dimon said they financed risky loans like subprime mortgages that helped drive more than $1.9 trillion in writedowns at financial institutions across the world.

Dimon said lax lending standards across the industry and excessive leverage and risk-taking by banks helped cause the crisis.

“You kind of got sucked into this whole sense of security because there were no losses,” Dimon said. “I would also say people lied. There was more and more of that in a frothy market.”

The report delivered today by Geithner and Housing and Urban Development Secretary Shaun Donovan presents three approaches for a future housing finance system. It calls on the government to shrink “and ultimately wind down” Fannie Mae and Freddie Mac, which regulators said were insolvent after the two suffered record losses from investments in subprime and other risky home loans.

Winding Down

“This is a plan for fundamental reform -- to wind down the GSEs, strengthen consumer protection and preserve access to affordable housing for people who need it,” Geithner said in a statement accompanying the report. The report also pledges ongoing U.S. government support to make sure Fannie and Freddie can make good on their debt payments and mortgage guarantees. The companies don’t lend directly to consumers. Instead, they buy mortgages from private lenders, package them into securities and guarantee timely loan payments to investors who buy the mortgage bonds.

Together, Fannie Mae and Freddie Mac accounted for 67 percent of the mortgage bonds issued in the third quarter of last year, according to U.S. government data. Government mortgage bond insurer Ginnie Mae accounted for 29 percent, leaving about 4 percent to private lenders.

President Barack Obama’s plan doesn’t endorse a particular option or offer legislation. All three proposals seek to end taxpayer support for Fannie Mae and Freddie Mac.

To contact the reporter on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net; David Scheer at dscheer@bloomberg.net

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