IN THE FIRST YEAR AND A HALF AFTER ITS CONSERVATORSHIP, Fannie Mae reported a staggering $127 billion in losses, exhausting its capital and causing it to draw $75 billion under its senior preferred stock agreement with Treasury in order to maintain a positive net worth. The size of these losses left little doubt in anyone’s mind about the severity of the company’s financial problems or the wisdom of Treasury and the Federal Housing Finance Agency in putting it into conservatorship when they did.

It only seemed that way. During that 18-month period, Fannie Mae’s actual credit-related losses—its loan charge-offs and foreclosed property expense—were just $16 billion. Virtually all the rest of its losses were accounting entries ...

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