I used quotes around the word "private" up above because the two GSEs had long enjoyed a presumption of government backing and loan guarantees that had enabled them to grow perhaps too large in shareholder value as well as in political power and arrogance. This led to them losing touch with their primary mission as they sought to increase profits. Even though they serve a critically important role in the liquidity of the housing marketplace, this rampant political power probably caused Congress and even some outside groups to let the firms' growing abuses of accounting standards slide for too long, despite the warnings of a significant group of academic and independent critics. Worse, their executive bonuses spun out of control, beyond rational or reasonable levels, as if the executives who worked there -- even for very short times -- had been deserving entrepreneurs who'd bootstrapped the firms' successes from inventions in their own garages based on their own genius, rather than leaned back in their leather chairs and relied on the explicit and implicit government guarantees and a booming housing market and economy for their actual successes.

See a recent Congressional Research Service summary of GSE issues. See also an older CBO study. While few would doubt that the dire circumstance of the interconnections between the U.S. housing crisis and the world economy necessitate some sort of drastic, rapid action by regulators, this entry by Alan White over at Consumer Law and Policy blog points out that:

The imminent nationalization of Fannie Mae and Freddie Mac (NYTimes story) while perhaps restoring some confidence in the short-run, cannot resolve the underlying debt crisis. The GSE's are being hit by both the decline in home values and the losses on subprime mortgage-backed securities they hold. Without government intervention to stop the tide of foreclosures and their attendant loss and waste, taxpayers will have to absorb continuing losses after the GSE shareholders are wiped out. As the taxpayers become the mortgage investors of last resort, it seems all the more reasonable for taxpayers to demand action to broadly restructure existing mortgages to align them with home values, instead of allowing foreclosures at 50% loss rates to continue.

My previous blog on the political power of the GSEs.