Where we came in?

Which road is it that's paved with good intentions, now?

In a speech Tuesday, Mr. Obama will begin making the case that a limited government guarantee is needed to preserve access to the long-term, fixed-rate loans that have become a staple of the U.S. housing market. But he also will call for ending the business model of Fannie and Freddie, which took on risks that benefited private shareholders during good times and saddled taxpayers with losses when the housing market crashed in 2008.

....The administration hasn't yet detailed exactly how that would work. 

Well, we can help with that;

Like a little acorn into a mighty oak.  But a blighted oak, according to James R. Hagerty's new The Fateful History of Fannie Mae, which packs an amazing amount of history into a little over 200 pages of  non-technical, very readable prose. 

Which was followed up with this;

Constituencies grow up around these programs and they are loath to see the goose fly away with its golden eggs. With the end of WWII,  newly civilian-ized GIs wanted housing, and Fannie Mae was looked upon as a way to provide the funds for it.  Which it did, thus growing even more established (and further from its New Deal roots).

And that followed a day later by this;

The inflationary 1970s came close to destroying Fannie Mae, as the rising interest rates for the short term money that it needed (under its business model) to fund its fixed rate long term (30 year) home loans made it technically insolvent by something like $11 billion.  But, the election of Ronald Reagan in 1980 provided Paul Volcker with the cover to arrest double digit inflation, and after a couple of years interest rates began to decline.  Fannie was home free (for awhile).

One measure of its newfound health was that its return on equity jumped from under 10% in 1986 to 33% by 1990.  It had attained that figure by high leverage, under the standard that it made the least risky home loans.  But, that standard wouldn't last.

With the final installment of the book review being;

Many influential people saw the risk in this (especially their low capital/high leverage model), including Alan Greenspan, David Stockman, Fed vice-Chair Preston Martin, Senator Phil Gramm, Treasury's Larry Summers and Gary Gensler, the WAPO's economics columnist Robert Samuelson, and financial analyst Josh Rosner, who warned (2001); The virtuous circle of increasing home ownership through greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures caused by lower savings....

But all those voices were defeated by the lobbying arm of Fannie Mae.  Which managed to co-opt even Paul Volcker (hired as a consultant to assess its own capital adequacy in 1990).  CEO Franklin Raines commissioned the Fannie Mae Papers written by economists Joseph Stiglitz and Peter Orzag that defended Fannie's risk models and claimed the danger of a taxpayer bailout to be near non-existent (2002).

It might have been the greatest lobbying offensive in U.S. history.  

So, for the WSJ reporter who just said, The administration hasn't yet detailed exactly how that would work.  See the above.