Freddie Mac’s ’Omniscient Gnomes’ Led the Company Astray

For me, a magazine advertisement in 1984 explains where it all went wrong. In a bizarre ad in the American Bankers Association journal, the chief financial officer of Freddie Mac, Leland Brendsel, appears to be consulting with gnomes on how to oversee America’s mortgage-backed securities markets.

According to the advertisement, “the gnomes of the secondary market, our omniscient associates” had brought the secret of securitization to Freddie Mac, the government-sponsored housing-finance company. Although clearly the result of an advertiser pulling an all-nighter, the gnomes reflected the supernatural aura of the collateralized mortgage obligation, which seemed to violate the rules of nature. Even to bankers, the system was mysterious. Yet its history was entirely conventional.