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Internal Memos Urged Fannie To Go 'Underground'

At Henry Waxman's (D-Calif.) Oversight committee, which is grilling four former heads of Fannie and Freddie, some internal Fannie documents were just presented that showed the company, in 2005, considering the pros and cons of entering the riskier sub-prime market.

If Fannie stayed out, it would not be exposed to risk. But it would also miss the potential of high-growth, high-profit investments.

In summary, the documents urged Fannie to "stay the course" in sticking with safe mortgages, but to undertake "underground" efforts to explore and invest in the sub-prime market. If Fannie did not, the internal documents warned that Fannie could become a "niche player," could be "less of a market leader" and "less relevant to the secondary market if we don't invest in these underground efforts."

In his defense, Daniel Mudd, Fannie chief executive during the time in question, said Fannie wasn't sure if the shift to sub-prime mortgages was "secular" or "cyclical," meaning permanent or one-time.

"We wanted to make sure we understood the emerging markets," Mudd testified. "We couldn't afford to take the bet" that the changes weren't permanent.

-- Frank Ahrens
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By Frank Ahrens  |  December 9, 2008; 11:12 AM ET
Categories:  The Ticker  | Tags: Fannie, Freddie  
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