Official Axed, Exposed Threat Of U.S. Housing Bubble Crash (In 2003)

On Feb. 4, the Office of Federal Housing Enterprise Oversight (OFHEO), which has oversight over the two giant housing-finance enterprises known as Fannie Mae and Freddie Mac, released a report entitled, "Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO." Its report examined the potential for the generation of a systemic crisis at Fannie and/or Freddie.

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After pro forma formulations that Fannie and Freddie are "fundamentally sound," and that the possibility of a serious crisis "is remote," OFHEO made a stunning statement about a worst-case scenario in which either Fannie or Freddie had a severe crisis which caused it to default on its debt. Such a default, it said, "could lead to contagious illiquidity in the market for those [debt] securities, [and] cause or worsen liquidity problems at other financial institutions ... potentially leading to a systemic event." This systemic event would deliver a shock to the entire financial system, and a "substantial loss in economic activity."

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Further, the OFHEO report discusses the risks to the financial system posed by derivatives—not simply the derivatives held by Fannie and Freddie, but the unregulated mountain of derivatives contracts in general.

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On Feb. 5, a mere 24 hours after the report's issuance, the Bush Administration demanded that OFHEO Director Armando Falcon submit his resignation. Falcon, who been appointed to this post in 1999 by President Bill Clinton, had overseen the report's release. While the Bush Administration delivered the order for Falcon to resign, both the circumstances of the firing and subsequent events make it clear that the actual order for the firing originated from inside the boardroom of J.P. Morgan Chase—the world's largest derivatives bank with $29 trillion in derivatives outstanding—and the boardrooms of other major institutions that are heavily invested in derivatives and housing market paper.