Last September, when the government took over Fannie Mae (FNM), CEO Dan Mudd was dismissed. He had logged an impressive career in business, rising to chief executive of GE Capital Japan (GE) before becoming vice-chairman and chief operating officer of Fannie under Franklin Raines in 2000. When Raines stepped down amid a scandal in 2004, Mudd took charge. But after the Federal Housing Finance Agency placed Fannie and Freddie Mac (FRE) in a conservatorship, Mudd and his board were ousted. Since then, Mudd has been on the sidelines, but he has strong views on how the bailout is being handled. We talked on Mar. 3, the day after the Dow swooned to below 6,800 and David M. Moffett, whom regulators had appointed CEO of Freddie, resigned after six months. On Mar. 4, President Obama announced new details of a plan to bolster at-risk homeowners and the housing market.
The bailouts continue, with AIG (AIG) getting more money yesterday. Where are we right now in this economic mess, and how do you view the government response?
We're in a crisis of confidence, and in order to reestablish confidence, the Administration has got to lay down some principles. I think it has to enunciate that we want a private financial system underpinning the economy that is strongly regulated. It's a new Administration, there are new faces in town. And it seems to me that the opportunity here is to say: "O.K., let's hit the reset button. Let's make it clear, here are our principles, here are our policies, here are our programs." Right now, it's impossible to tell what the [basic] principles are. I have no pattern recognition when I look at Fannie and Freddie and Bear and AIG and Citi (C)and Bank of America (BAC) and the rest. I would give all the financial institutions three months to clean up their balance sheets, sell their toxic assets—with the government there as the backstop—and make it clear that at the end of three months there are no breaks, no bailouts, no TARP, that it's the end of the story. And that would force these [toxic] assets to find a clearing price. It would define the limits of the government role, which I think everybody is looking for, and it would finally, I think, start to create more certainty.
Yesterday sort of felt like September all over again.It feels extremely uncertain—like we're swimming upstream in a murky river at night. Everybody wants to know when is it over, what inning are we in, and when is the market going to turn and all that. And I think that the best answer is actually going to be when we stop asking that question, that's when it's going to happen, because it will mean that people will have adjusted to a new reality, that they're not waiting for some mystical, magical turn in the market to help them out. They need to say: "Here's what I've got. I'm going to deal with it." And then we will kind of find ourselves back on bedrock, and we can start moving forward again. It's this wait and hope that's killing us.
In the early days of this crisis, you were in all the meetings. When did it become clear that the government was going to take the extraordinary step of conservatorship?Well, we had a series of cooperative discussions around clarifying what role the government might play. Then suddenly in early September we kind of were presented with a fait accompli that the board had a 24-hour deadline to accept or else. That was a significant change of tone and approach.
And during those discussions, you know, we asked what a conservator would do that the companies weren't doing. We asked basic questions about how the government would actually operate GSEs [government-sponsored entities like Fannie and Freddie] in the real world. At the time there didn't seem to be a lot of good answers. Now, five or six months later, the urgency [of the government action] is still not clear to me. It's still not clear to me why GSE shareholders were treated so much worse than bank shareholders.
A story in The New York Times today suggests that Fannie and Freddie will be controlled by the government permanently. Does that trouble you?It disappoints me because I think that the companies, historically, played a really important role in providing liquidity and stability to the mortgage market. But the bigger reason it troubles me is that without any framework, we are backing into an absolute sea change in terms of how we think about housing. We may not have a GSE like Fannie and Freddie, or a mortgage interest deduction, or a preference for homeownership as a way to stabilize communities. And as far as I can observe, there hasn't been a robust national debate about what we want the system to look like on the other side [of this crisis]. We're changing the system without thinking about where we want to end up.
House Financial Services Committee Chairman Barney Frank says the government wants to retain control of Fannie and Freddie to ensure such goals as affordable housing. Are the Democrats using this crisis to turn Fannie Mae into a mechanism for social engineering?One of the missions of the GSEs was always to provide affordable housing and to do so with private capital. I don't see a conspiracy.
Last month, Time ran a list of 25 people most responsible for the financial crisis, and Frank Raines, your predecessor as CEO of Fannie, was No. 5. You were his COO for four years. Are you willing to defend his tenure?I'm not going to comment on that one. I haven't thought enough about it to say something that would be helpful.
Will we ever again see the housing euphoria of a couple years ago?Yes, I think we will. It was wrong for people to say the paradigm has changed, and housing prices are never going to go down. But I think it's also wrong at this point to say we're in a new paradigm, and housing prices are never going to go up again. That's not the way this world works.