At a recent Senate hearing, Fannie Mae Chief Executive Officer Daniel Mudd asserted that he was “shocked” that in 1998-2004, while he was the company’s chief operating officer, Fannie Mae could have pulled off an $11 billion accounting fraud that he said he didn’t know about until 2004. Such an expression of innocence forces a few questions: What type of executive is that clueless about a massive accounting fraud going on under his nose?

— From “Covering their Fannie,” by Lee Drutman, on this page July 11, 2006.

One of the biggest lessons of the Fannie Mae/Freddie Mac debacle is simple: The federal government should not provide a guarantee, stated or implied, for the operations of any company. Such guarantees let them get too large, encourage political and corporate corruption, reduce competition and concentrate economic perils, even as the senior managements and directors manipulate the books to rake in millions for themselves.

Then when the economy goes south, these companies are so huge — because of their special treatment — that the Feds must decide that they are “too big to fail” and so the taxpayers must bail them out to prevent an all-out financial panic and severe recession. Private profit, public risk!

There was some glimmering of justice the other week, when Texas Sen. John Cornyn, a Republican, called for a criminal investigation of Fannie and Freddie in light of a 2006 government report that said that by “manipulating accounting to hit earnings targets,” top Fannie executives “maximized [their] bonuses and other executive compensation.” There are “serious concerns whether a well-documented culture of corporate executive corruption at these organizations contributed to the mortgage giants’ collapse,” the senator opined. The right idea but a little late, Senator.

Government deregulation of financial institutions has led to ever greater concentration of power in a few gigantic companies. For them to have problems means a greater disaster than when there’s competition among many firms. And now we’ll have more concentration than ever, to wit: the sale of Merrill Lynch to Bank of America, Wells Fargo (or Citigroup) gobbling up Wachovia, Barclays grabbing Lehman Brothers’ assets and so on. Indeed, it appears that the Bush administration is encouraging even more such consolidation, thus even more consolidation of risk. Sherman Anti-Trust Act, call your office!

Will Citigroup and Bank of America, etc., have to be bailed out one day because they’re too big to fail after their managements get too carried away with the thrill of risky investments? Probably.