The Freddy and Fannie election

Karl Rove:

Elections are often reshaped by unexpected and fast-moving events, and when this happens a candidate who quickly takes the lead on the new issue can bolster his chances to win. There is such an opportunity now for Barack Obama and John McCain with the crisis facing Fannie Mae and Freddie Mac.

The mortgage giants touch tens of millions of people because their core business is to buy, insure and securitize home loans. But they act like huge hedge funds with their portfolios worth hundreds of billions. As government sponsored enterprises (GSEs), they have an implicit federal guarantee that allows them to borrow money more cheaply than competitors. They have used that advantage to make ever-larger bets in their portfolios, generating big profits when home prices were rising, but big losses when housing weakened.

Congress ignored an early warning sign when Fannie and Freddie failed to produce accurate accounting statements in 2002. That should have spurred Congress to pass reforms proposed by the administration the next year to clean up the GSEs. It didn't.

Now with Fannie and Freddie at greater risk, Messrs. McCain and Obama need to think like would-be presidents instead of senators. That starts with ignoring former Fannie CEO Franklin Raines, who says reform isn't needed – this from a CEO who couldn't produce accurate accounting statements. The goal has to be to force the GSEs into a position where they can no longer put taxpayer dollars at risk.

Serious reforms must include immediate measures to prevent Fannie and Freddie from collapsing, and long-term changes to protect taxpayers. That means jettisoning the implied federal financial backstop and shrinking Fannie and Freddie.

The candidate who makes such proposals will likely gain on the issue of "who's better to handle the economy." Mr. Obama leads on this in the latest Time magazine poll, at 44%-37%. But Republicans often win if they are within six points on this issue. The economy is still a jump ball.

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Robert Novak says both parties have vulnerabilities on the Fanny and Freddy issue but Democrats seem to be more exposed. He says Rep. Barney Frank, Sen. Christopher Dodd and Sen. Chuck Schumer -- protected Fannie and Freddie when the issues were raised.

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Tuesday's hearing was more than an hour old when Hagel became the first senator to ask whether the well-paid officials and directors of the mortgage companies should be held accountable for the crisis. "I'm not looking for scapegoats," Paulson replied. The overriding mood recalled the question repeatedly posed, in a different context, by Bob Dole during his losing 1996 campaign for president: "Where's the outrage?"

Many of Paulson's non-scapegoats have traveled a familiar path from modest net worth to sudden wealth at the mortgage companies, especially Fannie Mae. Most have been Democrats, but token Republicans also have enjoyed the profitable ride. It is an old story, well described in "Crony Capitalism: American Style" by financial affairs reporter Owen Ullman in the July-August 1999 issue of The International Economy magazine. He portrayed rich "rewards" for fortunate insiders, including a $9.5 million income for Jim Johnson in 1998.

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Good for Sen. *. Fanny and Freddy are looking more like a Democrat Enron on stilts everyday. While we try to salvage the mortgage market we should not let the Democrats who profited from their mismanagement of these institutions off the hook.