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All Da King's Men

Did Anyone See The Fannie-Freddie Problem Coming ?

By Da King Published: September 17, 2008


Both of our presidential candidates supported the government takeover of Fannie Mae and Freddie Mac. Both of our presidential candidates now think Fannie and Freddie need to be restructured and monitored.

Thanks candidates. Now that the horses have left the barn, I'm glad you both wish to close the barn door.

But Fannie Mae and Freddie Mac were GSE's (Government Sponsored Enterprises). Our eminent politicos in Washington D.C. had intimate connections with both of them. These GSE's were filled with government cronies. Shouldn't someone in Washington have seen this problem coming, and shouldn't someone have taken measures to keep the horses in the barn long before things spun totally out of control ?

The answer is, someone DID see the Fannie-Freddie problem coming. The Bush Administration saw the problem coming five years ago, and recommended a series of preventitive actions. As the New York Times reported in an article called 'New Agency Proposed To Oversee Freddie Mac And Fannie Mae':

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

But the Bush recommendations were never acted upon, and the Fannie-Freddie problem grew and grew, resulting in a government takeover that puts taxpayers on the hook for potentially hundreds of billions of dollars.

Why weren't the Bush recommendations adopted ? You can find the answer in the same NY Times article:

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

Democrats condemned Bush's plan because they thought it would reduce the availability of low-income housing. This is a microcosm of the entire mortage crisis, because the populist intent of the mortgage and banking regulation changes for the last 30 years have been based upon expanding the availability of such housing. The government encouraged and often forced lenders to go outside their own lending comfort zone, and into risky loans. Now we are reaping the results of that irresponsibility.

Now for the kicker. Guess who Democrat Barney Frank, who led the opposition to the oversight of Freddie-Fannie, blames the problem on ? If you answered 'Bush and Republicans', you win first prize.

Democrats are also the biggest benefactors of Fannie-Freddie lobbyists. Barack Obama may talk about reducing the influence of lobbyists and special interests, but his campaign has received the second most political contributions from Freddie-Fannie lobbyists. The top three are all Democrats. As John Gibson reports for FoxNews:

Lehman Brothers collapse is traced back to Fannie Mae and Freddie Mac, the two big mortgage banks that got a federal bailout a few weeks ago.
Freddie and Fannie used huge lobbying budgets and political contributions to keep regulators off their backs.
A group called the Center for Responsive Politics keeps track of which politicians get Fannie and Freddie political contributions. The top three U.S. senators getting big Fannie and Freddie political bucks were Democrats and No. 2 is Sen. Barack Obama.
Now remember, he's only been in the Senate four years, but he still managed to grab the No. 2 spot ahead of John Kerry — decades in the Senate — and Chris Dodd, who is chairman of the Senate Banking Committee.
Fannie and Freddie have been creations of the congressional Democrats and the Clinton White House, designed to make mortgages available to more people and, as it turns out, some people who couldn't afford them.
Fannie and Freddie have also been places for big Washington Democrats to go to work in the semi-private sector and pocket millions. The Clinton administration's White House Budget Director Franklin Raines ran Fannie and collected $50 million. Jamie Gorelick — Clinton Justice Department official — worked for Fannie and took home $26 million. Big Democrat Jim Johnson, recently on Obama's VP search committee, has hauled in millions from his Fannie Mae CEO job.

Remember this the next time you hear Obama blaming "the failed policies of George Bush" for the mortgage crisis. Republicans surely aren't blameless in this, many of them also favored the deregulation policies, but Democrat policies were driving the trainwreck, and as I just showed, preventing reform. The last significant deregulation bill, which allowed investment banks (like Lehman Brothers) into the subprime loan market, was signed into law by Bill Clinton. You can read a brief history of housing deregulation in an old post I wrote called "Did Deregulation Cause The Subprime Crisis ?"



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