To the People

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Monday, July 14, 2008

How Fannie n' Freddie Got Fucked Up

The Washington Post has a good article in today's edition noting that for years people pointed out the warning signs regarding Freddie Mac and Fannie Mae. Thing was, too many people in Congress and the government had a piece of the action. So rather than pursue any kind of reform that would ensure the companies were solvent, they bullied and intimidated the people who dared raise any warnings:
From a Washington think tank to the halls of Congress, from the Treasury to the Federal Reserve, from the Clinton to the Bush administrations, critics of the government-sponsored mortgage giants have long argued that they were allowed to operate with financial cushions that were too thin to support their far-reaching financial risks.

The critics argued that regulators should be empowered to require deeper capital cushions at Fannie Mae and Freddie Mac, but their persistent efforts were thwarted in the face of the companies' formidable lobbying. Many members of Congress defended the companies, contending that efforts to rein them in were tantamount to an assault on housing.
They were quite brazen about it too:
The political battle lines were drawn by 2000, when a senior Clinton administration official called on Congress to take steps that might have diminished the companies' special status. Treasury Undersecretary Gary Gensler also urged that regulators be given more power to set capital requirements for Fannie Mae and Freddie Mac.

The companies fought back.

"We think that the statements evidence a contempt for the nation's housing and mortgage markets," Freddie Mac spokeswoman Sharon J. McHale said at the time.

Even after Freddie Mac was shown to have manipulated earnings, Congress remained deadlocked over legislation to create a stronger regulator. Opposing one such bill in 2004, Sen. Charles E. Schumer (D-N.Y.) argued that a hostile regulator could use the proposed powers to choke the companies.

When a federal regulator accused Fannie Mae of cooking its books to increase bonuses, lawmakers lined up to denounce the regulator. Rep. William L. Clay Jr. (D-Mo.) said a House panel had no business holding a hearing on the matter -- "unless this is truly a witch hunt." Fannie Mae was later found to have overstated profits by $6.3 billion.

Former representative Richard H. Baker (R-La.), who chaired a subcommittee that oversaw the companies, struggled for years to rein them in and tried to show they were being managed for the enrichment of their executives. When Baker obtained data on Fannie Mae pay, a lawyer for the company threatened him with personal liability if he made it public, Baker recounted last week.
Also worth checking out, Mickey Kaus' dismantling of Paul Krugman's recent column on the matter.

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