Saving Fannie and Freddy

The lead editorial in the NY Times discusses the need for urgency in moving to shore up Fannie and Freddy so they can keep providing liquidity to the mortgage market. If that happens the Congress should impose some restrictions on itself and the companies.

First there should be no more Jim Johnsons, i.e. no more sending former politicians to these companies to get rich. If the government is going to be responsible for the obligations of these companies they should not be used to line the pockets of Democrat politicians, as well as some Republicans.

The companies should not be used as a dumping ground for bad loans as proposed by some Democrats like Sen. Dodd.

Congress must stop mandating that lenders make loans to people who cannot afford them. It is especially egregious when Congress requires that people whose credit history such they would be poor risk go into default and Congress starts talking about "predatory lenders." It is these so called predatory lenders who are losing billions of dollars.

It is probably asking too much for Congress to take responsibility for the mess they made but we should at least try to keep them from doing the same thing again.

Paul Gigot explains how the crony capitalism works.

...

... Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk. Mr. Raines -- following predecessor Jim Johnson -- and Mr. Mozilo made each other rich. Which explains why Mr. Johnson could feel so comfortable asking Sen. Kent Conrad (D., N.D.) to discuss a sweetheart mortgage with Mr. Mozilo, and also explains the Mozilo-Raines tag team in 2003.

I recount all this now because it illustrates the perverse nature of Fannie and Freddie that has made them such a relentless and untouchable political force. Their unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of "affordable housing." To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo.

I know this because for more than six years I've been one of their antagonists. Any editor worth his expense account makes enemies, and complaints from CEOs, politicians and World Bank presidents are common. But Fannie Mae and Freddie Mac are unique in their thuggery, and their response to critics may help readers appreciate why taxpayers are now explicitly on the hook to rescue companies that some of us have spent years warning about.

My battles with Fan and Fred began with no great expectations. In late 2001, I got a tip that Fannie's derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, "Fannie Mae Enron?", sent Fannie's shares down nearly 4% in a day. In retrospect, my only regret is the question mark.

...

The companies eased their assaults when they concluded we weren't about to stop, and in any case they soon had bigger problems. Freddie's accounting fiasco became public in 2003, while Fannie's accounting blew up in 2004. Mr. Raines was forced to resign, and a report by regulator James Lockhart discovered that Fannie had rigged its earnings in a way that allowed it to pay huge bonuses to Mr. Raines and other executives.

Such a debacle after so much denial would have sunk any normal financial company, but once again Fan and Fred could fall back on their political protection. In the wake of Freddie's implosion, Republican Rep. Cliff Stearns of Florida held one hearing on its accounting practices and scheduled more in early 2004.

He was soon told that not only could he hold no more hearings, but House Speaker Dennis Hastert was stripping his subcommittee of jurisdiction over Fan and Fred's accounting and giving it to Mike Oxley's Financial Services Committee. "It was because of all their lobbying work," explains Mr. Stearns today, in epic understatement. Mr. Oxley proceeded to let Barney Frank (D., Mass.), then in the minority, roll all over him and protect the companies from stronger regulatory oversight. Mr. Oxley, who has since retired, was the featured guest at no fewer than 19 Fannie-sponsored fund-raisers.

...

There is much more. The reaction to the editorial was furious. As I have said the companies have their protectors in both parties, but the Democrats are their most ferocious defenders and beneficiaries. Any bailout needs to deal with this corrupt relationship. It is something the NY Times needs to address in its brief for the bailout.