By Richard Larsen
Published – Idaho State Journal, 09/28/08
An article in the New York Times, September 11, 2003, outlined a proposal by President Bush that would have been “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.” His proposal was for an agency within the Treasury Department to supervise mortgage giants Fannie Mae and Freddie Mac. But fearing that mortgages would no longer be available to people who were unable to pay them back, Congressional Democrats and some defecting spineless Republicans eventually killed the proposal.
Senator John McCain joined with three other Republican senators in sponsoring the “Federal Housing Enterprise Regulatory Reform Act of 2005.” The legislation (Senate Bill 190), was introduced in January, 2005, at which time, according to Congressional records, Senator McCain declared, “This week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were ‘illusions deliberately and systematically created’ by the company's senior management, which resulted in a $10.6 billion accounting scandal.”
The Office of Federal Housing Enterprise Oversight's (OFHEO) report went on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. The report of financial misconduct at Fannie Mae echoed the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also stated that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems. This report came some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports for the past two years.
Senator McCain concluded his remarks in 2005, “For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac. OFHEO's report solidifies my view that the GSEs (Government Sponsored Enterprises) need to be reformed WITHOUT DELAY. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”
Ironically, that same month, January, 2005, interim Fannie Mae CEO Daniel Mudd gave special thanks to Barack Obama for his support of Fannie Mae, which is surprising since Obama had just been elected to the U.S. Senate. In that same swearing-in ceremony of the Democratic Congressional Black Caucus Mudd called those assembled the “family and conscience of Fannie Mae.” Somehow I don’t think that’s a compliment in light of facts today.
The 2005 statements by McCain provide a concise synopsis of some of the problems at Fannie and Freddie and now seem almost prophetic. His summation was accurate then, and as we can see now, the problems have grown exponentially. Like the President’s proposal two years earlier, his proposed legislation was defeated before it even got to the floor of the Senate, in large part because of intense pressure from Senator Christopher Dodd (D-Con.) and Representative Barney Frank (D-Mass.). Not coincidentally, they are the chairmen of the Senate Banking Committee and the House Financial Services Committee respectively. The irony is unmistakable, that two of the individuals most responsible for our current financial dilemma are the ones charged with fixing it. Just for the record, the other legislators most influential in killing the legislation were John Kerry, Hillary Clinton, and Barack Obama. Not coincidently, those three, along with Senator Dodd, were the top beneficiaries of campaign contributions from Fannie and Freddie and their employees.
As Charles Calomiris, Professor of Finance and Economics at Columbia Business School said this week in the Wall Street Journal, “The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.”
Over the past ten years the two mortgage giants have dished out over $250 million for lobbyists and campaign contributions. With former Clinton administration officials like Franklin Raines and Jamie Gorelick leading the charge at Fannie, and with such deep pockets, the efforts at reform were effectively blocked. Raines and Gorelick made off with a cool $100 million and $75 million respectively, when they left the company.
Meanwhile, Fannie and Freddie have been throwing money around like there was no tomorrow, which it appears there is none: for them, there is no tomorrow. They have been regular contributors to Jesse Jackson’s Rainbow Coalition. Each year they donate $100,000 and $150,000 respectively at Jackson’s primary fund-raising event. Further, Freddie awarded $1 million to Jackson’s group for a financial literacy program, which Jackson turned around and charged participating churches and organizations $1,000 for.
The “blame game” is probably only of interest to historians, for we know none of these culpable legislators will ever be held accountable, even by the press, for their roles in our current financial crisis. But it is also relevant in the context of a presidential campaign where one candidate gladly accepted the campaign contributions from the failing GSEs and then fought legislation to reform them while the other saw the problems and abuses years ago and tried to reign them in, albeit unsuccessfully. Based on their judgment and their historically documented actions, you tell me which presidential candidate is more legitimate.