Report on the Freedie Mac scandal that

shook the US mortgage markets in 2003.

Introduction

Originally known as the Federal Home Loan Mortgage Corporation, Freddie Mac was
chartered by Congress in 1970 as a private company with a public mission to stabilize the
nation's mortgage markets and widen opportunities for home ownership and affordable rental
housing. Freddie Mac (and its sister institution Fannie Mae) was set up based on the idea that
neither government nor private banking interests could address the nation's housing finance
needs. The company's charter established a board comprising 18 members - thirteen elected
by shareholders and five appointed by the President of the United States.

Freddie Mac is a Government-Sponsored Enterprise (GSE), that is, a business entity that has
a distinct relationship with the government. GSEs usually enjoy special perks and privileges
that other businesses do not receive. Freddie Mac, for example, is exempt from state and local
taxes. Neither is it subject to standard disclosure rules imposed on other financial institutions.
It is rated by credit rating agencies such as Moody's. GSEs such as Freddie Mac are among
the world's largest securities issuers.

Freddie Mac is one of the biggest buyers of home mortgages in the U.S and is a publicly
traded company. It buys mortgages from mortgage lenders, such as commercial banks and
other financial institutions, repackages them as (mortgage-backed and debt) securities, which
are then purchased by investors. Mortgage-backed securities are more liquid than individual
mortgages. Institutions like Freddie Mac make their profits from the difference between the
cost of its debts and the return on its mortgage holdings. Their role is to serve as a secondary
market conduit between mortgage lenders and investors. Mortgage lenders use the proceeds
from selling loans to Freddie Mac to fund new mortgages. In this way, Freddie Mac
replenishes and increases the supply of funds available for homebuyers and apartment owners
from mortgage lenders. About fifty percent of all new single-family home mortgages today
are sold to secondary market conduits.

Concept of mortgage loans

A mortgage loan, or simply mortgage, is used either by purchasers of real property to raise
funds to buy real estate, or alternatively by existing property owners to raise funds for any
purpose, while putting a lien on the property being mortgaged. The loan is "secured" on the
borrower's property through a process known as mortgage origination. This means that a
legal mechanism is put into place which allows the lender to take possession and sell the
secured property ("foreclosure" or "repossession") to pay off the loan in the event the
borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is
derived from a "Law French" term used by English lawyers in the Middle Ages meaning
"death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled
or the property is taken through foreclosure. A mortgage can also be described as "a borrower
giving consideration in the form of collateral for a benefit (loan)".

The United States mortgage industry is a major financial sector. The government has also
tried to give boost to this industry by creating various mortgage companies including Freedie
Mac and Fannie Mea and backing them to further affordable housing to its citizens.

But the United States mortgage sector is plagued by crisis time and time again. Unsound
lending practices resulted in the National Mortgage Crisis of the 1930s, the savings and loan
crisis of the 1980s and 1990s and the subprime mortgage crisis of 2007 which led to the 2010
foreclosure crisis. An important addition to this list of crisis that had far reaching
repercussions is the Freedie Mac scandal of 2003.

Freedie Mac Accounting Scandal of 2003.

Introduction

In 2003, Freedie Mac announced that the last three years of its financial reports had to be
restated. The reaction of the market was not so strong as it was common in the sector to
restate the reports and include or rectify some minor accounting errors. But on 9 June 2003,
without any further disclosures the company dismissed its CEO Leland Brendsel. This
incident sparked a speculation in the market, as a result of which the share value of Freedie
Mac plunged by around 20%. A subsequent report of the board of directors revealed that
accounting controls had been weak and certain accounting decisions had been taken to
smooth out volatility in reported earnings1. On November 21, 2003, the restatement of past
accounting results was released2, as summarized in the table below. It is noteworthy that
while the net effect of the restatement was to increase reported earnings, restated net income
for 2001 was almost $1 billion less than originally reported. Freddie Mac notes that the
restatement shows “significantly greater volatility than previously reported.”

1
Mark Jickling, Accounting and management problems at Freedie Mac p.2 CRS report to Congress (2003).
2
Appendix II, p. 2. Available online at
[http://www.freddiemac.com/news/archives/investors/2003/restatement_112103.html].
Source- Freedie Mac press release, November 21 2003.

Background

Freedie Mac played an important role in the secondary mortgage markets in the United
States. Freedie bought mortgages from buyers and repacked them, in the form of securities,
which it either held or sold to public investors. Freedie financed its purchase of mortgage
loans by selling bonds, either bonds backed y its own financial resources or mortgage backed
securities, where interest and principal payments made by homeowners are passed to the
bond holders.

More than 60% of all single family mortgage debt were sold in the secondary market, or
“securitized.” As the leading players in this market, the housing GSEs represented an
extraordinary concentration of financial risk. Because there was a strong public interest in
ensuring that Freddie and Fannie remain financially strong, Congress in 1992 created
OFHEO, a safety and soundness regulator dedicated exclusively to these two institutions.

The savings and loan crisis of the 1980s illustrated the riskiness of the mortgage market. If
interest rates rise, financial institutions may find that their cost of funds exceeds their income
from long-term, fixed-rate mortgages. If rates fall, homeowners refinance their mortgages and
reduce income streams to institutions, which must still pay off debt previously issued at
higher interest rates. Protection from interest rate risk was critical to the soundness of the
GSEs, and it appears that strategies to avoid, or “hedge, risk were partly responsible for
Freddie’s accounting problems.

As an illustration of this, consider data on Fannie Mae’s year-by-year mortgage purchases

over the next decade from 1992 onwards. While complete data are not available, using the
annual reports of Fannie and Freddie, and recently released data by the FHFA, Figure 2.1
graphs the share of risky mortgage loans each year, as defined by either LTV>90% or
80%<LTV<90%.13 While it was commonly known that the FHA and VA made risky loans,
it is less well-known that Fannie (and Freddie) already had a growing presence in the high
LTV mortgage market during the 1990s. Fannie’s role generally increased over the next
several years both in dollar amounts and market share. For example, from just 6% ($11.6
billion) of loans having LTVs>90% in 1992, by 1995, the number of loans with LTVs>90%
had doubled to $20.9 billion and 19% of Fannie Mae’s purchases. Though the percentage of
loans with LTVs>90% dropped to 13% by 2001, the dollar amounts increased substantially to
$68.3 billion.

While Freddie Mac’s annual reports provide only a snapshot of their mortgage holdings by
year, the data tell a similar story. For example, in 1992, their mortgage book held just 3% of
its loans with original LTVs>90% (and 13% with 80%<LTV<90%). The next year, this
number 30 increased to 4% and 15% respectively, and by 1994 to 9% and 18%. By the late
90s, the number had steadied to around 10% of loans with LTVs>90% and 15% with
80%<LTV<90%3.

Fannie Mae Mortgage Purchases with High LTVs (1992-2002)

Source - Annual reports of Fannie Mae, Inside Mortgage Finance.

As corroborating evidence, consider data on Fannie and Freddie’s mortgage holdings and
insurance guarantees starting from the mid 1990s that have been put together by Ed Pinto, the
former chief credit officer of Fannie Mae (1987-1989). He provides data and analysis of two
series: loans based on LTV, and loans based on FICO scores. His data on LTV-based loans
are generally consistent with Figure . The second series, that of “subprime” mortgage loans,
makes an even stronger case for the earlier involvement by the GSEs in risky lending. While
the mere mention of subprime now brings up an immediate negative connotation, subprime
loans are generally considered to be ones that were granted to individuals with poor credit
histories. The Pinto dataset combines so-called self-denominated subprime loans (i.e., those

3
Viral Acharya, Freedie Mac and Fannie Mae, and debacle of mortgage finance p. 31,32.
 that were originated by subprime lenders or placed in subprime MBS) and loans with FICO
credit scores below 660, the minimum threshold for standards set by Fannie and Freddie in
the mid 1990s. Pinto shows that the dollar volume of these loans hovered between $200 and
$300 billion from 1997-2000, and, like the high LTV market above, Fannie, Freddie and the
FHA held a significant share (ranging from 50-60%), with Fannie and Freddie contributing
approximately one-half. For the next three years, Fannie and Freddie’s risky lending and
private label mortgage-backed security purchases (in terms of FICO<660) went from $76
billion in 2000 to $175 billion in 2001 to $244 billion in 2002, with a 50% market share4.

Relationship between Freedie Mac and the Federal government.

Both Freddie Mac and its larger Government Sponsored Enterprise (GSE) cousin, the
Federal National Mortgage Association (Fannie Mae), were treated in the law as
“instrumentalities” of the federal government with some features of publicly listed
corporations and others that are more similar to wholly owned government agencies5. In
exchange for certain public policy responsibilities related to housing,( Specifically, the
charters state that it is the purpose of Fannie Mae and Freddie Mac to: Provide stability in the
secondary market for residential mortgages; respond appropriately to the private capital
markets; provide ongoing assistance to the secondary market for residential mortgages by
increasing the liquidity of mortgage investments and improving the distribution of investment
capital [towards mortgage markets]; and promote access to mortgage credit nationwide.)6 , the
federal government provided both firms’ securities with several explicit advantages that had
convinced the financial markets that the Treasury (i.e., taxpayers) stood behind them. This
was often referred to as the GSE’s “implicit guarantee.”

The advantages given to the Freedie Mac by the federal government were,
1. Their debt and mortgage backed securities are exempt from registration with the Securities
and Exchange Commission, although in July 2002 both companies agreed to register their
common stock under the Securities and Exchange Act of 1934 and to make other disclosures;
2. they are exempt from state and local corporate income taxes;
3. they have a line of credit from the Treasury that authorizes Treasury to purchase up to $2.25
billion of Fannie Mae and Freddie Mac’s obligations;
4. banks are permitted to make unlimited investments in Fannie and Freddie’s debt securities,
whereas there are limits placed on their investments in any other company's debt securities;
5. Fannie and Freddie’s securities are eligible as collateral for public deposits and for loans from
Federal Reserve Banks and Federal Home Loan Banks;
6. Fannie and Freddie’s securities are lawful investments for federal fiduciary and public funds;

4
Viral Acharya, Freedie Mac and Fannie Mae, and debacle of mortgage finance p.32.
5
Congressional Budget Office, Effects of Repealing Fannie Mae’s and Freddie Mac’s SEC Exemptions,
May 2003.
6
Federal National Mortgage Association Charter Act,” (12 U.S.C. 1716-1723); “Federal Home Loan Mortgage
Corporation Act,” (12 U.S.C. 1451-1459), and “Federal Housing Enterprises Safety and Soundness Act of
1992,” Title XIII of P.L. 92-550 (12 U.S.C.4501).
7. Fannie and Freddie are authorized to use Federal Reserve Banks as their fiscal agents,
including issuing and transferring their securities through the book-entry system maintained
by the Federal Reserve.
All these advantages given by the federal government to the Freedie Mac and Fannie Mae
companies gave a huge edge to these companies over their private competitors. These
exemptions reduced the total operating costs of these two firms relative to other publicly
listed firms by about $1 billion annually7.

Although – as the management of both Fannie and Freddie is quick to note – the charters of
both GSEs explicitly disavow any federal (i.e., taxpayer) responsibility for their securities,
the reality is that investors do not believe the government would abandon their financial
obligations.
This was made obvious in 1981 when a dramatic rise in interest rates left Fannie Mae
insolvent on a mark-to- market basis (means that the market value of Fannie’s liabilities
exceeded the
market value of its assets). Were it not for Fannie Mae’s special relationship with the federal
government – between 1978 and 1985, the federal government provided Fannie with implied
annual credit support estimated to range between $600 million and $11 billion8 – the firm
likely would have failed that year or the next. Thankfully, interest rates subsided the
following years, and no direct bailout was necessary; but it is clear that the markets continued
to loan to Fannie Mae with the expectation that the government would have come to its
assistance if necessary.
As a result of the implicit guarantee Freedie and Fannie were not paying their investors
market-based interest rates on their borrowings. A 2001 study of Congressional Budget
Office(CBO), estimated that the relation of Freedie and Fannie with the Federal government
lowered its long-term borrowings by 0.46 percent in 2000 with translated into an earnings of
$6 billion in only that year. A more recent study found that, after adjusting for issue size,
credit rating, and other relevant factors, the average spreads for private corporations relative
to Fannie Mae issues were
0.29 percent for AA-rated bonds, 0.46 percent on A-rated bonds, and 0.83 percent on BBB
issues9.

Accounting issues in Freedie Mac

Appendix II to Freddie Mac’s November 21 restatement discusses the accounting errors that
made revision necessary. The major factors underlying the accounting errors are described as
“lack of sufficient accounting expertise and internal control and management weaknesses....”
In addition, certain transactions and accounting policies were implemented to achieve steady

7
Federal Subsidies and the Housing GSEs, Congressional Budget Office, May 2001.
8
Congressional Budget Office, Effects of Repealing Fannie Mae and Freddie Mac’s SEC Exemptions.
9
Brent W. Ambrose and Arthur Warga, “Measuring Potential GSE Funding Advantages,” Journal of Real
Estate Finance and Economics, Vol. 25, No. 2, 2002.
growth in reported earnings. The two accounting policies that appear to have been most
important in this regard — yielding 88% of the upward revision in pre-tax net income — are
the classification of securities and accounting for derivatives instruments. How these issues
affect net earnings is discussed below. Since 2000, interest rates have fallen dramatically —
mortgage rates from over 8% to as low as 5.2%. The fall in rates had two major impacts on
Freddie Mac’s financial statements. Both Freddie’s bond portfolio4 and the derivatives
contracts Freddie had purchased to hedge the risk of falling interest rates5 increased sharply
in value. Under generally accepted accounting principles (GAAP), these gains in asset value
should have been reported as current income.

However, Freddie chose accounting treatments for these asset gains that deferred recognition
of income until later years, thus “smoothing out” the effects of falling interest rates. The
restatement of earnings is based upon Freddie’s and its new auditor’s decision that these
accounting policies were incorrect. Much of Freddie’s bond portfolio was held in an
accounting category called “held to maturity” (HTM). This meant that the bonds would not
be sold, and that therefore day to- day fluctuations in their market value were irrelevant; all
that mattered was the amount of principal and interest payments, which was fixed and known
in advance. These bonds were carried on Freddie’s balance sheet at historical cost, which
meant that increases in the bonds’ market value (as interest rates fell after 2000) were
essentially ignored, and did not appear as current earnings.

However, during the 2000-2002 period, some of the bonds classified as HTM were sold. As
a result, the restatement reclassifies much of the entire bond portfolio as “available for sale”
(AFS), and changes in market value are recognized. Gains in the bonds’ value over the period
appear in the restated earnings as either current earnings or stockholders’ equity.
Derivatives accounting is governed by FAS 133 of the Financial Accounting Standards Board
(FASB). Under FAS 133, the fair value of all financial derivatives must be calculated
(“marked-to-market”) at the end of each accounting period. Changes in fair value from the
previous accounting period must be reported as current income, unless the derivatives are
used for hedging. If a derivative is used to hedge an asset, the value of that asset — the
hedged item — will move in the opposite direction to the derivative’s value. Thus, a fall in
the price of the hedged asset will be offset by a gain in the derivative (or vice versa). Under
FAS 133, the firm can recognize as earnings both the change in the derivative’s value and the
offsetting change in the hedged item’s. If the gains and losses are closely correlated, the net
effect on reported earnings will be very small or zero.

There is another form of hedge accounting under FAS 133, covering derivatives held to
hedge a future transaction or cash flow. Since the hedged item in this case does not yet exist,
it cannot be marked to market and used to offset gains in the derivative’s fair value. However,
FAS 133 allows the gain or loss in a derivative used to hedge a future event to be assigned to
comprehensive income, a subcategory of stockholders’ equity. When the future transaction or
cash flow occurs, the derivative is marked to market and changes in fair value are recognized
as current income, but presumably gains or losses in the derivative will be offset by the
hedged item. Either form of hedge accounting has the effect of reducing the impact of
changes in derivatives’ fair value on current earnings and the bottom line.

To qualify for this accounting treatment, however, FASB requires that there be a close
relationship between changes in the value of the derivative and the hedged item. Derivatives
that do not meet FASB’s hedge test are considered speculative trading instruments, and
changes in fair value from period to period must be recognized and reported as current
earnings.
Freddie Mac, like most U.S. corporations that use derivatives, states in its annual report that it
does not use derivatives for speculative purposes. In its restatement, however, Freddie
concludes that most of its derivatives in 2001 and 2002 did not qualify as accounting hedges.
This means that, from a GAAP perspective, these were speculative positions. Recognition of
fair value gains and losses in derivatives positions resulted in an upward revision of pre-tax
net earnings by $5.0 billion.

Based on the November 21, 2003 restatement, the accounting treatments of derivatives and
bond portfolios were the major factors in the restatement. In both cases, the drop in interest
rates to1950s levels produced unexpected windfall gains in the value of financial instruments.
Freddie chose not to recognize these gains to avoid creating an impression of earnings
volatility, knowing that these gains would be reversed if the trend in interest rates turned
upwards. According to the June 25 statement, accounting policies were designed “with a
view to their effect on earnings in the context of Freddie Mac’s goal of achieving steady
earnings growth.” In other words, Freddie sought to “smooth out” reported earnings and
reduce volatility by deferring to future years earnings that should have been recognized under
GAAP as current income.
An internal report to Freddie’s board of directors issued in July 2003 provides further detail
on specific transactions designed to defer earnings and produce the desired accounting
results10. The report concludes that these transactions, and the accompanying accounting
policies, indicated serious deficiencies in Freddie Mac’s internal controls, disclosure
practices, and in the governance policy of former management.

The report notes, however, that these transactions do not appear to have been made “at the
expense of the company’s risk management policies and practices.”11 In the November 21,
2003 restatement, Freddie Mac stated that it “accepts” the report’s conclusions.

In November 2005, Freddie announced that its reported income for the first half of 2005
would have to be restated and reduced by about $200 million, because of problems in a
“legacy” computer system.

10
Baker Botts L.L.P., Report to the Board of Directors of the Federal Home Loan Mortgage Corporation:
Internal Investigation of Certain Accounting Matters , December 10, 2002 – July 21, 2003, 107 p.
11
Ibid., p.iii.
The June 25, 2003, release noted several actions taken to fix weaknesses in accounting and
management controls. These include the expansion of senior accounting staff, creation of an
operating risk oversight unit, and strengthening the review of accounting and other critical
business operations. In conjunction with OFHEO, Freddie has embarked on a
“comprehensive remediation program,” to effect “broad changes in the finance function.”

In 2006, Freddie reported that its remediation effort had proved to be much more difficult and
complex than expected. Among the areas where work continued were mitigation of identified
material weaknesses and significant deficiencies, strengthening of the financial close process,
implementing critical systems initiatives, and completion of a review of the company’s
system of internal controls related to the processing and recording of the company’s financial
transactions. In March 2007, the company filed its 2006 annual report and thus resumed
timely annual reporting. Timely quarterly reporting was expected to resume by the end of
200712.

Consequences of the scandal.

According to Political Money Line, a group that tracks federal lobbying expenditures,
Freddie Mac was one of the Top 10 spenders among all companies in 2003. It was the first
financial firm in many years to rank as one of the Top ten. According to a company
spokesperson, "The large increase (you saw) in 2003 was due to the need to communicate
and inform Congress of the very complex issues related to the earnings restatement. In the
early years, we had very low lobbying expenses compared to similar companies of our size."
The company gave $2.3 million to Republicans and $1.7 million to Democrats in soft money
contributions during the 2002 election cycle.

According to the company's website, its board of directors created a governance committee in
2002 to address corporate governance matters, including development of corporate
governance guidelines. It has also said that it intends to separate the positions of Chairman
and CEO by 2006. In November 2003, following its accounting scandals, it announced that it
had retained the services of Professor Charles Elson, a recognized expert in the field, "to
strengthen the company's corporate governance practices, policies, and guidelines."

In the wake of the corporate scandals of 2001 and 2002, Congress passed the Sarbanes-Oxley
Act (P.L. 107-204), not only to restore investor confidence but also to preempt future
corporate scandals and accounting fraud. Congress recognized that the current law provided
inadequate protections from corporate malfeasance, and so it took steps to construct better
incentives and treat wrongdoing with harsher penalties. As a result, the risk of similar
misconduct in the future has been reduced.

Strength of the senior accounting staff was increased.

12
Mark Jickling, Accounting and management problems at Freedie Mac p.4,5 CRS report to Congress (2003).
Operating risk oversight unit was created in the company.

In December 2003, OFHEO settled its investigation of Freddie Mac’s accounting problems
with a consent agreement. Freddie admitted to no wrongdoing, but agreed to pay a $125
million fine.

In September 2005, Freddie agreed to help federal investigators pursue former CEO Leland
Breindsel and former CFO Vaughn Clarke, who were forced out in 2003. Freddie also agreed
to seek recovery of their severance pay and stock awards, which totaled tens of millions of
dollars, if the regulators determine that misconduct was involved in the accounting scandal.

Two bills in the109th Congress — S. 190 (reported by the Senate Banking Committee on July
28, 2005) and H.R. 1461 (passed the House on October 26, 2005) — propose to restructure
GSE regulation13.The bills would replace OFHEO with an independent agency with authority
over Fannie, Freddie, and the Federal Home Loan Banks. The bills would enhance the safety
and soundness tools available to the GSE regulator, giving it more flexibility to establish and
enforce risk management and operational and capital standards, and allowing it to put a GSE
into receivership, if necessary.

A criminal investigation was announced by federal prosecutors in Northern Virginia, where

Freddie Mac had its headquarters, but no indictments were handed down.

The impact of 2003 crisis on the financial crisis of 2008

Fannie Mae and Freddie Mac grew very large in terms of assets and mortgage-backed
securities (MBSs) issued. With their funding advantage, they purchased and invested in huge
numbers of mortgages and mortgage-backed securities, and they did so with lower capital
requirements than other regulated financial institutions and banks.

Figures 3 and 4, below, produced by the companies' former regulator, the Office of Housing
Enterprise Oversight, show the incredible amount of debt issued by the companies, their
massive credit guarantees, and the huge size of their retained portfolios (mortgage investment
portfolios). U.S. Treasury debt is used as a benchmark.

13
Government-Sponsored Enterprises: Regulatory reform Proposals, by Mark Jickling.
Figure 3

Source: Office of Federal Housing Enterprise Oversight

Figure 4

Source: Office of Federal Housing Enterprise Oversight

Fannie Mae and Freddie Mac had many critics who tried to raise a red flag of concern about
the risks the companies were allowed to take thanks to their implicit government backing.
However, despite these early warning cries, Fannie Mae and Freddie Mac found many allies
in Congress.

Conclusion

It is clear that oversight of the company was completely inadequate at all levels. The OFHEO
failed in its responsibility to ensure its safety and soundness. HUD allowed it to stray from its
fundamental mission of expanding home ownership and affordable housing. The company's
board, as the OFHEO report points out, was complacent and failed to exercise adequate
oversight.
But that does not justify calls for privatization of Freddie Mac and elimination of its core
public mission of providing affordable housing for low-income and minority populations.
Current proposals to create a more effective and independent regulatory agency could work if
they don't become a victim of inter-agency battles. GSEs like Freddie Mac should have the
same disclosure rules that apply to other financial institutions. When oversight of an
institution as important as Freddie Mac falls on one of the smallest federal regulatory
agencies, the public has reasons to be worried. At the same time, the company needs to do
more than just step up it political lobbying expenditures and fulfill its obligation of expanding
opportunities for home ownership and affordable rental housing.
The Freddie Mac fraud was a clear shortcoming of the Federal government. This was nothing
but a blatant breach of rules which resulted in a loss of billions of dollars to the federal
treasury. The fraud very clearly shows the red-tap involved in the American government. The
fraud exposed one of the pressing problems of the capitalist economy which united states
follows. Such a fraud is not at all possible in any other country apart from United states.
Because of the capitalist culture of the American economy the beaurocracy is highly involved
in the business sector of the country and they try to maximize their personal profits when they
are in government and thus give way or either turn a blind eye towards such frauds which in
turn help them in making profits. If the US government was a separate entity and had no say
in the Freedie Mac firm they there was no way in which this fraud could reach this high
magnitude of 5 billion dollars. The Freedie Mac Company used the backing provided to them
by the federal government to the fullest of its advantage and made very grave accounting
frauds to cover the difference in the balance sheets. These anomalies could have been easily
traced if the government was just a regulating body had no say or connection to the firm.
Because of the narrow goals of the government then in power, the whole world suffered an
economic recession in the year 2008 which resulted in an quantifiable economic loss which
was exponential to the loss caused due to the Freedie fraud of 2003. Even after the public
disclosure of the Freedie Mac accounting errors and the restatement that was made
subsequently the government did not act prudently. The government should have come down
heavily on the Freedie Mac authorities and corrected oll the problems that had caused this
fraud. If the government would have brought in stringent rules to govern such government
companies with the view to prevent such frauds in the future, then there would not have been
the financial crisis of 2008, which disturbed the whole world economies and had far reaching
consequences. As shown by the reports produced after the 2003 crisis, the Freedie Mac and
Fannie Mac still had majority of the mortgage loans in 2007. This clearly shows that
measures taken by the government had no effect on the frauds that were prevalent in the
companies. Thus we can conclude that this fraud was very much avoidable if the government
wanted to avoid it, but the government rather facilitated the fraud and thus was a direct cause
for the economic crisis of 2008. This fraud gives a strong government to the future
government that they have to maintain distance from the business concern and be careful
their working and the government’s involvement in such trading concerns.