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there won’t be a private company in the world that will stand up to them.”
    With the benefit of hindsight, it’s hard to argue that REMIC authority was the cataclysmic event that either party feared it was at the time. While Fannieissued its own securities, Wall Street made immense amounts of money marketing and selling them—Fannie never had the ability to find the Japanese bank or the Midwest insurance company that might want a specific tranche. And Fannie was always going to play an important role in the mortgage-backed market because of its guarantees, which were prized by investors. Essentially, it got to decide which mortgages were worthy of securitization and which were not, and mortgage lenders had to offer mortgages that conformed to the GSEs’ strict standards. Indeed, after all the hype over REMICs, a series of big losses at several Wall Street firms—trader talk had it that Merrill Lynch lost over $300 million, which at the time was a big sum—caused the market to cool on carving up cash flows in such extraordinarily complex ways. At least for a time, the Street returned to old-fashioned pass-through securities, the ones that didn’t tranche the bonds, but simply sent the cash flow along to investors. The hedge fund manager David Askin, who lost hundreds of millions of investors’ money buying mortgage-backed securities that were supposed to have very low risk, told
Institutional Investor
that “not all this stuff is for kids in the studio audience to try and do at home.”
    On the other hand, the future of the mortgage market might have been very different if Fannie Mae had lost control of it at that critical juncture. And the battle between Fannie and Wall Street did have consequences that would linger for a very long time. The threats that Fannie had faced—not just from a Wall Street that wanted to clip its wings, but from a White House that wanted to take away its built-in advantages—deeply affected Fannie’s corporate mind-set. Its attitude became one of outsized aggression toward even the most insignificant of threats. “You punch my brother, I’ll burn your house down” was the saying around the company. The idea that Fannie should be stripped of its government advantages became, in Maloni’s words, “the vampire issue”: it never completely went away. Fannie always felt that its opponents, whether competitors or critics in the government, were out to kill it. In this, it was absolutely right.
    In addition, the REMIC fight established Fannie and Freddie as forces not just in Washington but on Wall Street. The two companies completely dominated the market for so-called conforming mortgages—that is, thirty-year fixed mortgages under a certain size made to buyers with good credit histories. “It was the end of the game,” says Nevins. By the end of the 1980s, there was more than $611 billion worth of outstanding GSE-guaranteed mortgage-backed securities, according to a study by economic consultingfirm Empiris LLC. The outstanding volume of private mortgage-backed securities—the ones without GSE guarantees—was just $55 billion, less than one-tenth that amount. Fannie, meanwhile, went from losing a million dollars a day to making more than $1 billion a year. Its market value exploded from $550 million to $10.5 billion.
    As for the larger dangers of mortgage-backed securities—the ones that would emerge in the years before the financial crisis—they were largely overlooked as Wall Street and the GSEs raced to establish a market for their new miracle product. Largely, but not entirely. At one congressional hearing, Leon Kendall, then chairman of the Mortgage Guaranty Insurance Corporation, a private insurer of mortgages, offered up a prophetic warning: “With all our concern in enhancing the secondary mortgage market, we should continue to have appropriate and equivalent concern relative to keeping people in houses.” Historically, he noted, less than 2 percent of people lost