Inside a Washington Gang

Portfolio's Dan Golden has chronicled well the cozy connections in Washington D.C. that helped Angelo Mozilo build Countrywide into a mortgage giant.

In today's Wall Street Journal, Paul Gigot provides an unsettling look at the kind of the backlash he caught from executives, politicians and even Mozilo himself, when his editorial page wrote critically about Fannie Mae and Freddie Mac.

Mozilo, always the gentleman, accosted him at a cocktail party and told him he didn't know what he "was talking about," and that he didn't understand "accounting or the mortgage markets," and accused him of being "in the pocket of Fannie's competitors."

Charming enough on its own, but even worse in the wake of Portfolio's report that Mozilo's firm ran a V.I.P. mortgage program for politicians and bigwigs to curry favor with them. A few of the key players in that are now in the employ or the orbit of Fannie and Freddie.

Gigot's piece names names about Wall Street analysts who complained to Dow Jones management about his Fannie and Freddie articles, which questioned the way the ungainly pair accounted for their derivatives positions.

Among his public critics was George Gould, once a Treasury undersecretary for finance, who joined the Freddie board and was there when its "accounting lapses finally exploded into a scandal."

Most importantly, perhaps, is that at the heart of the attack on Gigot was whether there was an implicit government guarantee on Freddie and Fannie that allowed it to take risks it wouldn't otherwise have and whether Wall Street eagerly packaged and sold its mortgages knowing always that the pair would be bailed out.

Gigot writes that according to the Federal Reserve, for a scant improvement in U.S. homeownership attributable to the GSEs, "Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002."

Now, with an explicit bailout in the offing, The Journal echoes the concerns in the market since last week, that "Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever."

Golden's Portfolio coverage and now, this Journal piece, shows how they now-troubled mortgage giants were partners and their reach extended comfortably from Wall Street to Washington with little regard for the consequences to taxpayers and the overall economy.

Dan Colarusso