In December 2004 he found out that his instincts were correct. He was sitting in his office when he received a call from Ann McLaughlin Korologos, the lead director. Korologos, the tough, no-nonsense former Labor secretary, and a member of several boards, was a consummate Washington insider. She got right to the point. “Dan,” she said, “I need you to come down to the Four Seasons in Georgetown. We are going to dismiss Mr. Raines and several others. Before we do that, we need to know whether you would be willing to serve as the interim CEO.” Mudd was speechless. He couldn’t believe what he was hearing.
“She said they didn’t know whether I was a good guy or a bad guy—or words to that effect,” Mudd recalled. “But, at least for the moment, I was all they had, and they needed somebody to be running the place.”
Mudd agreed to meet at the Four Seasons restaurant in Georgetown. It was very cloak-and-dagger. Korologos instructed him to go in the side door where someone would meet him, and he went in and waited. When he sat down with Korologos and other board members, he saw that the situation was dire. Fannie Mae was in disarray. There were massive accounting errors, understating losses by about $9 billion over the past three years. Someone had to stick around and clean up the mess, and Mudd was elected.
By then it was questionable whether anyone could turn around the massive enterprise, which had for so many years operated as its own private kingdom, outside the reach of regulators. Raines and his lieutenants were being criticized for amassing personal wealth at the expense of an agency meant to serve average Americans. In 2006 the Office of Federal Housing Enterprise Oversight (OFHEO) filed charges against Raines and two other former executives, alleging fraud and seeking $110 million in penalties and $115 million in returned bonuses. But in a 2008 settlement, the three men agreed to a mere $3 million in fines—and that would be paid by Fannie Mae’s insurance company.
The next two years were intense as Mudd supervised the largest restatement that had ever been done, and returned Fannie Mae to responsible accounting practices. Impressed by his work, the board offered to make Mudd permanent CEO. Mudd had always planned to leave once the mess was cleaned up, but he had grown more comfortable with Fannie Mae’s culture, and his family loved being in Washington. “Okay,” he said, “I’ll stay and give it my all.”
And then the housing market imploded.
Like every other entity holding mortgage securities, Fannie Mae was forced to address serious issues of liquidity and toxic assets during 2008. By August alarm bells were ringing about how undercapitalized Fannie Mae and Freddie Mac were. Even so, their regulator had given them a pass that summer. Then, right before Labor Day, Mudd received a puzzling letter from the Federal Housing Finance Agency (FHFA) detailing serious capital issues. “The letter basically said, ‘I’ve changed my mind. I now think you have serious capital issues.’ It was weird,” he told me.
Mudd picked up the phone and called Secretary Paulson, and that was weird, too. “What’s going on?” he asked Paulson. “This is different than the good-faith discussion we had two days ago.”
“I can’t talk,” Paulson said. “We’re setting up a meeting.”
Mudd, accompanied by his board chairman and general counsel, headed over to the FHFA offices for the meeting. As they were standing in the reception area waiting to be called, Ben Bernanke walked in.
“How’s it going?” he asked Mudd in a friendly tone.
“Good,” Mudd replied. “How’s it going with you?”
“Good, good.”
“Nice weekend. Weather was pleasant.”
As Mudd told me later, “It was totally pathetic. The world was in flames, and we were talking about the weather.”
At a meeting upstairs, joined by Paulson, Mudd learned his fate. The federal government was taking over Fannie Mae and Freddie Mac. “We’re going to declare conservatorship,” Bernanke said, “and we want your whole board to be here tomorrow morning. We need a decision in twenty-four hours, and if you don’t want to do it the easy way, we’ll do it the hard way.”
Just like that, Mudd was out. Over at Freddie Mac, CEO Richard Syron was hearing the same news. It was a done deal.
“Some people thought Fannie was a bit stronger than Freddie; others thought it wasn’t stronger than Freddie. Some even argued that Fannie was weaker than Freddie,” a source at the Treasury told me. “So there was some discrepancy in terms of how they stood. But the bottom line was that they were both sufficiently weak, so that as a result of the assets that they were holding, they were going to be in trouble very soon. In fact, they were already in trouble, desperate trouble. So we knew that we were going to be stuck with the bill on Fannie and Freddie. And then the question was what to do with it.” Even the most market-oriented people at the Treasury favored conservatorship, because Fannie and Freddie were not full-fledged market institutions anyway.
“It was essentially the worst of both worlds there,” my source said. “We had a nonmarket entity with government backing that was behaving badly. I think we all agreed that it was time for those guys to go under. Maybe their role had been important once, but many of us thought they had become obsolete.”
Pimco’s Mohamed El-Erian put it this way when we discussed it: “The problem was that they tried to run a commercial activity in a noncommercial setting. In the noncommercial setting, there were objectives related to increasing home ownership, with the expectation that loans were fully guaranteed by the government. In the commercial setting, Freddie and Fannie tried to maximize their profits. So you had a noncommercial context with commercial behavior, and
