WikiLeaks - Secret Congressional report foresaw Fannie Mae's negative impact on financial markets right before the eruption of the global crisis

The CRS is a Congressional "think tank" with a staff of around 700. Reports are commissioned by members of Congress on topics relevant to current political events. Despite CRS costs to the tax payer of over $100M a year, its electronic archives are, as a matter of policy, not made available to the public. Individual members of Congress will release specific CRS reports if they believe it to assist them politically, but CRS archives as a whole are firewalled from public access. This report was obtained by Wikileaks staff from CRS computers accessible only from Congressional offices. 

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A report from April, 2007, examines the practice of privatization of many government services in the United States, emerged in the late 1970s and early 1980s.

An interesting part of the report explains the distinction between privatization and marketization, an alternative to privatization, which is "the structuring of a government agency so that it provides goods and services in the efficient manner of a private firm."

The report gives an example of two entities in the area of the secondary home-mortgage market. Ginnie Mae, which is a government-controlled marketized entity and Fannie Mae, which is a private entity charged with governmental responsibilities, at that time.

Quite impressively, the report acknowledges that the government-controlled entity is much more secure against the risks produced by the private one, which behaves quite aggressively in its effort to maximize profits. 

Furthermore, the report actually warns that Fannie Mae might negatively affect world financial markets. And all these, right before the eruption of 2007–08 global financial crisis.

As the report points out, "Ginnie Mae is a government corporation; generally, it has been viewed as competently operated." On the other hand, "Fannie Mae’s efforts to grow its business also have been criticized for threatening to create “spill-over” effects that might negatively affect world financial markets."

Full paragraphs:

                    The marketized agency also may be less prone to the pathologies that afflictsome private firms. The contrast between two entities, the Government National Mortgage Association (Ginnie Mae, 12 U.S.C. 1716-1723) and the Federal National Mortgage Association (Fannie Mae, 12 U.S.C. 11A), is illustrative. Both of these entities were created by Congress to provide liquidity to the secondary home-mortgage market. Ginnie Mae is a government corporation; generally, it has been viewed as competently operated.

                    Fannie Mae, on the other hand, is a private entity charged with governmental responsibilities. While its successes are manifold, it has been reproached frequently in recent years. Critics have said that Fannie Mae’s pursuit of profits has led it to undertake a number of undesirable behaviors. In order to protect its profits, the firm has been accused of aggressively lobbying Congress, perhaps through questionable means. It has been criticized for excessively compensating its top executives. Fannie Mae’s efforts to grow its business also have been criticized for threatening to create “spill-over” effects that might negatively affect world financial markets. Recently, the company also has found itself accused of manipulating its financial reporting for the purposes of producing earnings pleasing to investors and enabling its top management to collect large annual bonuses.

Fannie Mae was taken over by the federal government on September 7, 2008. Also, there is evidence that competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. Major US investment banks and GSEs (government-sponsored enterprises) such as Fannie Mae played an important role in the expansion of lending, with GSEs eventually relaxing their standards to try to catch up with the private banks.

It's also impressive that the report was recognizing that Fannie Mae "has been accused of aggressively lobbying Congress, perhaps through questionable means."

More evidence for the fact that the Congressional mechanisms were fully aware of the enormous risks from privatized services, due to lack of regulation and governmental scrutiny.