No Irene, this is not something from the soap, “As The Stomach Turns”. The financial giants!

Fannie Mae was set up by the federal government in 1938 as part of the New Deal to inject capital into a mortgage market mired in the Great Depression. It was a public agency with the explicit mission of providing government credit so that average families could buy homes.

In 1968, it was turned into a private but government-sponsored corporation with the aim of getting mortgage debt off of the government’s books under conditions in which the Vietnam War was creating growing fiscal pressures. Freddie Mac was created in 1970 as a similar “government sponsored enterprise.” By the 1990s, the two agencies became central to the speculative housing bubble that underlay the profit boom on Wall Street that preceded the current crisis of the world financial system.

Both of the mortgage giants had been involved in previous accounting scandals. Freddie Mac underwent a shakeup in 2003 after it was revealed that earnings figures had been falsified to the tune of $5 billion, while at Fannie Mae, the company was accused of “accounting errors” totaling $6.3 billion. Both Freddie and Fannie were forced to pay fines and replace their chief executives, but no criminal investigations were initiated and no substantive change was initiated in the companies’ operations.

As the New York Times described these operations, the two firms used the implicit government commitment to bail them out “to borrow money at below-market rates and lend money at above-market returns,” turning them into “what amounted to gigantic hedge funds operating with only a sliver of capital to protect them from unexpected surprises.”