Ranieri & Co. intended to transform the "whole loans" into bonds as soon as possible by taking them for stamping to the U.S. Government. Then they could sell bonds to Salomon's institutional investors as, in effect, U.S. government bonds. For that purpose, partly as the result of Ranieri's persistent lobbying, two new facilities had sprung up in the federal government alongside Ginnie Mae. They guaranteed the mortgages that did not qualify for the Ginnie Mae stamp. The Federal Home Loan Mortgage Corporation(called Freddie Mac) and the Federal National Mortgage Association(called Fannie Mae) between them, by giving their guarantees, were able to transform most home mortgages into government backed bonds. The thrifts paid a fee to have their mortgages guaranteed. The shakier the loans, the larger the fee a thrift had to pay to get its mortgages stamped by one of the agencies. Once they were stamped, however, nobody cared about the quality of the loans. Defaulting homeowners became the government's problem. The principle underlying the programs was that these agencies could better assess and charge for credit quality than individual investors.Reported by the Wall Street Journal on August 30, 2008: "The Fannie and Freddie Question".
In mid-2007, with defaults up and the market for mortgage securities faltering, Mr. Paulson's concerns about housing grew. He asked Robert Steel, then a Treasury undersecretary (and now Wachovia Corp.'s CEO), to canvass experts. Among those called was Lewis Ranieri, who years ago helped pioneer the repackaging of home loans into securities. Treasury officials gathered around a speakerphone as Mr. Ranieri told them the mortgage situation was "a bit more troubling" than most people realized, says a person familiar with the call.Read Liar's Poker.