Excellent article on Fannie Mae

[2centsworth]

This may be a tough read for some on this board, but it's accurate.
http://www.investors.com/editorial/I...20080922&rss=1

'Crony' Capitalism Is Root Cause Of Fannie And Freddie Troubles


BY TERRY JONES
INVESTOR'S BUSINESS DAILY
Posted 9/22/2008
In the past couple of weeks, as the financial crisis has intensified, a new talking point has emerged from the Democrats in Congress: This is all a "crisis of capitalism," in socialist financier George Soros' phrase, and a failure to regulate our markets sufficiently.
Well, those critics may be right — it is a crisis of capitalism. A crisis of politically driven crony capitalism, to be precise.
Indeed, Democrats have so effectively mastered crony capitalism as a governing strategy that they've convinced many in the media and the public that they had nothing whatsoever to do with our current financial woes.
Barack Obama has repeatedly blasted "Bush-McCain" economic policies as the cause, as if the two were joined at the hip.
Funny, because over the past 8 years, those who tried to fix Fannie Mae (FNM) and Freddie Mac (FRE) — the trigger for today's widespread global financial meltdown — were stymied repeatedly by congressional Democrats.
This wasn't an accident. Though some key Republicans deserve blame as well, it was a concerted Democratic effort that made reform of Fannie and Freddie impossible.
The reason for this is simple: Fannie and Freddie became massive providers both of reliable votes among grateful low-income homeowners, and of massive giving to the Democratic Party by grateful investment bankers, both at the two government-sponsored enterprises and on Wall Street.
The result: A huge taxpayer rescue that at last estimate is approaching $700 billion but may go even higher.
It all started, innocently enough, in 1994 with President Clinton's rewrite of the Carter-era Community Reinvestment Act.
Ostensibly intended to help deserving minority families afford homes — a noble idea — it instead led to a reckless surge in mortgage lending that has pushed our financial system to the brink of chaos.
Subprime's Mentors
Fannie and Freddie, the main vehicle for Clinton's multicultural housing policy, drove the explosion of the subprime housing market by buying up literally hundreds of billions of dollars in substandard loans — funding loans that ordinarily wouldn't have been made based on such time-honored notions as putting money down, having sufficient income, and maintaining a payment record indicating creditworthiness.
With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an "implicit" government guarantee of the debts.
This created the problem we are having today.
As we noted a week ago, subprime lending surged from around $35 billion in 1994 to nearly $1 trillion last year — for total growth of 2,757% as of last year.
No real market grows that fast for that long without being fixed.
And that's just what Fannie and Freddie were — fixed. They became a government-run, privately owned home finance monopoly.
Fannie and Freddie became huge contributors to Congress, spending millions to influence votes. As we've noted here before, the bulk of the money went to Democrats.
Dollars To Dems
Meanwhile, Fannie and Freddie also became a kind of jobs program for out-of-work Democrats.
Franklin Raines and Jim Johnson, the CEOs under whom the worst excesses took place in the late 1990s to mid-2000s, were both high-placed Democratic operatives and advisers to presidential candidate Barack Obama.
Clinton administration official Jamie Gorelick also got taken care of by the Fannie-Freddie circle. So did top Clinton aide Rahm Emanuel, among others.
On the surface, this sounds innocent. Someone has to head the highly political Fannie and Freddie, right?
But this is why crony capitalism is so dangerous. Those in power at Fannie and Freddie, as the sirens began to wail about some of their more egregious practices, began to bully those who opposed them.
That included journalists, like the Wall Street Journal's Paul Gigot, and GOP congressmen, like Wisconsin Rep. Paul Ryan, whom Fannie and Freddie actively lobbied against in his own district. Rep. Cliff Stearns, R-Fla., who tried to hold hearings on Fannie's and Freddie's questionable accounting practices in 2004, found himself stripped of responsibility for their oversight by House Speaker Dennis Hastert — a Republican.
Where, you ask, were the regulators?
Congress created a weak regulator to oversee Freddie and Fannie — the Office of Federal Housing Enterprise Oversight — which had to go hat in hand each year to Capitol Hill for its budget, unlike other major regulators.
With lax oversight, Fannie and Freddie had a green light to expand their operations at breakneck speed.
Fannie and Freddie had a reliable coterie of supporters in the Senate, especially among Democrats.
"We now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years," wrote economist Kevin Hassett on Bloomberg.com this week.
Buying Friends In High Places
Over the span of his career, Obama ranks No. 2 in campaign donations from Fannie and Freddie, taking over $125,000. Dodd, head of the Senate Banking panel, is tops at $165,000. Clinton, ranked 12th, has collected $75,000.
Meanwhile, Freddie and Fannie opened what were euphemistically called "Partnership Offices" in the districts of key members of Congress to channel millions of dollars in funding and patronage to their supporters.
In the space of a little more than a decade, Fannie and Freddie spent close to $150 million on lobbying efforts. So pervasive were their efforts, they seemed unassailable, even during a Republican administration.
Yet, by 2004, the crony capitalism had gone too far. Even OFHEO issued a report essentially criticizing Fannie and Freddie for Enron-style accounting that let them boost profits in order to pay their politically well-connected executives hefty bonuses.
It emerged that Clinton aide Raines, who took Fannie Mae's helm as CEO in 1999, took in nearly $100 million by the time he left in 2005. Others, including former Clinton Justice Department official Gorelick, took $75 million from the Fannie-Freddie piggy bank.
Even so, Fannie and Freddie were forced to restate their earnings by some $3.5 billion, due to the accounting shenanigans.
As we noted, those who tried to halt this frenzy of activity found themselves hit by a political buzz saw.
President Bush, reviled and criticized by Democrats, tried no fewer than 17 times, by White House count, to raise the issue of Fannie-Freddie reform. A bill cleared the Senate Banking panel in 2005, but stalled due to implacable opposition from Democrats and a critical core of GOP abettors. Rep. Barney Frank, who now runs the powerful House Financial Services Committee, helped spearhead that fight.
Now, with the taxpayer tab approaching $1 trillion or more, we're learning the costs of crony capitalism.
In the coming days, an IBD series will look into this phenomenon in greater detail — how we got here, who's responsible, and why nothing was done

[101A]

But the Republicans controlled Congress for almost that entire term. It ain't the Dems fault; it's the fault of those in power; and for Christ's sake; the Republicans had BOTH houses and the White house for 6 ing years. Dodd has only been chairman for two; why wasn't his Republican counterpart screaming from the rooftops for all to hear?

Now, ironically, McCain does seem to be one who was making some noise, but he may very well pay for his (and his opponent's) party's sins.

[DarrinS]

Good read. Thanks.

[2centsworth]

But the Republicans controlled Congress for almost that entire term. It ain't the Dems fault; it's the fault of those in power; and for Christ's sake; the Republicans had BOTH houses and the White house for 6 ing years. Dodd has only been chairman for two; why wasn't his Republican counterpart screaming from the rooftops for all to hear?

Now, ironically, McCain does seem to be one who was making some noise, but he may very well pay for his (and his opponent's) party's sins.

I suppose you didn't read the entire article. They will name names next including both dems and rep

[101A]

I suppose you didn't read the entire article. They will name names next including both dems and rep

Thanks; when I have a minute I'll read the whole thing.

[101A]

President Bush, reviled and criticized by Democrats, tried no fewer than 17 times, by White House count, to raise the issue of Fannie-Freddie reform. A bill cleared the Senate Banking panel in 2005, but stalled due to implacable opposition from Democrats and a critical core of GOP abettors. Rep. Barney Frank, who now runs the powerful House Financial Services Committee, helped spearhead that fight.

Traitors.

Name them.

Line them up.

Shoot them.

[Crookshanks]

Traitors.

Name them.

Line them up.

Shoot them.

I agree - well maybe not shoot them - but EVERYONE who had a part in this mess should be forced to resign AND forfeit their government pension! In addition, the bank accounts of Raines, Johnson, Gorelick and any others involved should be frozen and the ill-gotten gains returned to help offset the cost of the bailout. Unless we taxpayers get REALLY mad and demand some changes (like tossing out every congressman involved), nothing will happen and we'll be left footing the bill for these criminals!

[spurster]

It's like deja vu all over again.

Let me one thing clear. My opinion is that the Democrats sucked on this issue, but so did the Republicans.

Quoting myself from an earlier thread:

http://www.spurstalk.com/forums/showthread.php?t=105018

Note the dates. The Senate bill was passed by the Senate committee and went nowhere. Later, the House bill (to spell it out for whottt, the two bills were dee-iii-eff-eff-eee-arr-eee-enn-tee) was passed and went nowhere in the Senate. My take is that neither party at that point in time thought this issue was serious enough to solve. The differences between what the two parties wanted were not that great.

from http://www.govtrack.us/congress/bill.xpd?bill=s109-190

S. 190 [109th]: Federal Housing Enterprise Regulatory Reform Act of 2005

Last Action: Jul 28, 2005: Committee on Banking, Housing, and Urban Affairs. Ordered to be reported with an amendment in the nature of a subs ute favorably.

from http://www.govtrack.us/congress/bill.xpd?bill=h109-1461

H.R. 1461 [109th]: Federal Housing Finance Reform Act of 2005

Passed House 331-90 Oct 26, 2005

Last Action:
Oct 31, 2005: Received in the Senate and Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.

In the House vote, a majority (emm, aaa, jay, ohh, arr, aye, tee, why) of Democrats voted for the bill (122-74). How is it that a majority of House Democrats could vote for this, yet a similar bill failed in the Senate? I believe the main answer has to do with affordable housing elements that were in the House bill, but not in the Senate bill.

https://www.policyarchive.org/bitstr...pdf?sequence=1

H.R. 1461 was reported by the Committee on Financial Services to the
House with an Affordable Housing Fund provision on July 14, 2005.

H.R. 1461 was passed by House by a vote of 331 to 90 and sent to the
Senate on October 30, 2005.

S. 190 was reported by the Committee on Banking, Housing, and Urban
Affairs to the Senate without an Affordable Housing Fund provision on
July 28, 2005.

Here is a description of some of the manuevers in the Senate Committee:

http://goliath.ecnext.com/coms2/summ...99-4747361_ITM

GSE reform bill clears Senate Committee along party-line vote.(Business Alert)
Publication Date: 01-SEP-05
Publication le: Mortgage Banking

...

The Republican-backed measure would require Fannie Mae and Freddie Mac to sell portfolio assets unrelated to their mortgage securities businesses. A Democratic alternative would have permitted the regulator to reduce the GSEs' portfolio without requiring such cuts.

During deliberations, Senate Banking Committee Chairman Sen. Richard Shelby (R-Alabama) dismissed the alternative submitted by ranking member Sen. Paul Sarbanes (D-Maryland), noting it did not give enough portfolio guidance to the regulator and had safety and soundness limits that were "not sufficient."

In opposing portfolio caps, Democrats expressed concern that such restrictions would harm Fannie and Freddie's ability to ensure the mortgage market liquidity needed to foster affordable housing.

"There seems to be an expectation on the part of some that if Fannie and Freddie stop holding the assets in their portfolios, that the rest of the market will somehow instantaneously fill the void and that prices will not be affected," said Sen. Jon Corzine (D-New Jersey). "I do not believe that is a reasonable expectation."

S. 190 co-sponsor Sen. Chuck Hagel (R-Nebraska) countered that the GSEs' portfolios are profitable for Fannie Mae and Freddie Mac shareholders, but do little to advance their housing mission.

"Fannie and Freddie are public companies with shareholders, and their boards have a fiduciary responsibility to those shareholders. But Congress did not create GSEs to enrich share-holders and executives," said Hagel. "They were created to provide stability and capital in the secondary housing finance market."

The committee also rejected an amendment by Sen. Jack Reed (D-Rhode Island) that would have directed the GSEs to contribute a percentage of their earnings to an affordable-housing trust fund. But the committee approved an amendment by Sen. Rick Santorum (R-Pennsylvania) to rewrite Fannie and Freddie's affordable-housing goals. Both measures were rejected and adopted, respectively, along party-line votes.

...

I think what we have here is a failure to compromise. The GOP wanted more limits on Fannie and Freddie than the Democrats and the GOP did not want the affordable housing part. The two parties did not compromise and so the weak regulations were left in place. It appears a similar scenario happened in 2007, though this time with a Democratic majority and the Senate GOP preventing action on the House bill.

More details, pros, and cons can be found by Googling on:

"GSE Reform Bill" affordable housing 2005