A Subsidiary Trying to Forget Its Parent
Every family has one relative nobody wants to bring up at dinner. For Fannie Mae, that relative is the Reconstruction Finance Corporation, the New Deal lending machine this series covered two weeks ago, the one that spiraled into a corruption scandal so severe it forced Congress to write the Government Corporation Control Act of 1945 just to contain the damage.
Fannie Mae was not inspired by the RFC. It was chartered on February 10, 1938, as a wholly owned subsidiary of the RFC itself, capitalized with roughly ten million dollars in RFC funds and tasked with buying up FHA insured mortgages so banks would keep lending during the Depression, according to a detailed institutional history of the entity compiled from congressional records. Seventeen years after its parent got shut down for operating as an unaccountable financial power center, Fannie Mae is still around, still backed by an implicit federal promise nobody in Washington will fully admit to, and still, as of this writing, technically a ward of the state. Its sibling, Freddie Mac, has been along for the ride since 1970. Between them they now guarantee or hold something like 7.7 trillion dollars in mortgage debt, more than the debt of every company and government on earth except the United States and Japan, according to researchers at the University of Florida’s Warrington College of Business.
The Vietnam War Era Accounting Trick That Still Runs the Mortgage Market
Here is where the story gets genuinely absurd. In 1968, the Johnson administration needed to make the federal budget look smaller while paying for the Vietnam War and the Great Society simultaneously. Fannie Mae, still a line item on the government’s books, was an inconvenient liability. So Congress passed the Housing and Urban Development Act of 1968, split Fannie Mae into two pieces, spun off the fully government owned mortgage insurance function into a new entity called Ginnie Mae, and turned the rest into a nominally private, shareholder owned corporation. Fannie Mae’s debt vanished from the federal balance sheet essentially overnight, a maneuver policy analysts have bluntly described as a clever accounting solution driven by budget politics rather than any free market conviction that Fannie Mae belonged in private hands.
The new “private” Fannie Mae kept a two billion dollar line of credit with the Treasury, stayed exempt from state and local income taxes, and never had to register its securities with the SEC, the kind of privileges no actual private mortgage company enjoys. Congress created a second entity, Freddie Mac, in 1970 specifically to give Fannie some competition, using the identical hybrid structure. The Competitive Enterprise Institute summarized the resulting arrangement about as bluntly as anyone has: the model privatized the profits to shareholders while socializing the losses onto taxpayers, and it stayed that way for four decades because nobody in either party had much incentive to change it while the mortgages kept performing.
They stopped performing in 2007. By the time the subprime crisis hit full force, Fannie and Freddie together held or guaranteed 5.3 trillion dollars in mortgage backed securities and debt, an amount roughly equal to the entire publicly held debt of the United States government at the time, according to congressional testimony from then FHFA Director James Lockhart. On September 6, 2008, with both companies unable to raise capital and staring down eighty nine billion dollars in debt coming due within months, their own boards agreed to hand control to the newly created Federal Housing Finance Agency under the Housing and Economic Recovery Act, according to FHFA’s own history of the conservatorships. The federal government had spent forty years pretending Fannie Mae was not its problem. It became the government’s problem again in a single weekend, and Treasury ultimately pumped in 191.5 billion dollars to keep both entities solvent.
The Entities Built to Dodge the Law Written to Catch Them
This is the part that should genuinely bother anyone who followed the Fourth Branch piece in this series. Congress wrote the 1945 Government Corporation Control Act specifically to make sure entities like the RFC could never again grow into unaccountable, off books financial power centers without mandatory budgets, GAO audits, and borrowing limits. Fannie Mae and Freddie Mac sidestepped that entire accountability regime by design, not by accident. Because the 1968 restructuring made them nominally private, shareholder owned companies, they were never classified as government corporations under Title 31 at all. They are government sponsored enterprises, a separate legal category invented specifically to capture the benefits of a federal charter, the implicit backstop, the tax breaks, the cheap funding, while dodging the exact oversight machinery Congress built after the RFC scandal.
In other words, Washington did not just fail to learn the lesson of the RFC. It engineered a structure explicitly designed to route around that lesson, and the result was an entity that grew larger and more systemically dangerous than the RFC ever was, precisely because nobody was legally required to watch it the way the 1945 Act required watching TVA or the FDIC. The GSE model is the RFC’s most consequential offspring not because it repeated the RFC’s mistakes, but because it corrected for the wrong ones.
Eighteen Years of “Temporary”
Conservatorship was supposed to be a stabilization measure. As of this writing it has run eighteen years, longer than the RFC itself lasted from birth to liquidation. Fannie and Freddie returned to profitability by 2012 and have since paid the government back many times over in dividends, which has only intensified the political fight over what to do with them next. Treasury Secretary Scott Bessent said in 2025 that ending the conservatorships was an explicit administration goal, and FHFA Director Bill Pulte has spent 2026 signaling that the arrangement should not continue indefinitely. In late June, Representative Scott Fitzgerald introduced the Sustainable Homeownership Act, a bill aimed at establishing statutory guardrails for a formal release, according to National Mortgage Professional’s coverage of the legislation. Hedge fund manager Bill Ackman has been buying the common stock of both companies for years on the bet that release is coming, and named it his best investment idea heading into 2026.
Nobody involved seems eager to just let the conservatorship expire on its own terms, because nobody can agree on what happens to the implicit government guarantee once it does. Release Fannie and Freddie without an explicit backstop from Congress and investors may demand higher returns to compensate for the added risk, which likely means higher mortgage rates for every homebuyer in the country, a concern serious enough that both Bessent and Pulte have said publicly they will not move forward if the data shows rates going up.
That is the real inheritance the RFC left behind. Not a single scandal or a single bailout, but a durable federal habit of building financial entities that look market disciplined on paper while carrying government risk in practice, then discovering decades later that unwinding the arrangement is far harder than creating it ever was. The RFC took twenty five years from founding to liquidation. Fannie Mae and Freddie Mac have already outlasted that timeline twice over, and the exit ramp is still being drafted in real time, in Congress, this year, while the rest of us wait to see who actually ends up holding the risk when the paperwork finally clears.
Next in the series: the entities that never broke this way, TVA and the FDIC, and what it actually takes for a government corporation to do the one thing it was designed to do without becoming somebody’s eighteen year headache.
Bureaucracy Times 