Don’t lump in Fannie & Freddy with the rest

These were not private companies folks

There has been plenty of outrage in the progressive blogosphere of late over government money going to investment firms, insurance companies, etc. who have caught up to the average consumer and fallen upon difficult economic times.  Claims of corporate welfare for private companies and favoritism for millionaire buddies are then lodged against GOP members like the Bush Administration, John McCain and even local 26 Congressional District candidate Chris Lee:

Ouch great sound bite.  Which business’ Mr Lee?  it isn’t about the business now it it – it is about the bail out, the socialized risk and golden parachute.  Fannie, Freddie, ING, Lehman, Bear Sterns, All the rest.   Sorry you have to do better than that.

This then of course launches into a diatribe about the evils of fiscal conservatism.

The problem here is placing Fannie Mae and Freddy Mac, publicly supported companies underwriting federally insured loans, in the same category as private enterprises like Lehman Bros.

While the progblogs are right to call attention to lack of oversight they may want to be more cautious about who they claim to be at fault.  While Bush and McCain are vilified in this instance by altmedia the Washington Post puts the histories of Fannie and Freddie in context:

Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them. The companies fought successfully against increased regulation by cultivating their friends and hounding their enemies.

-snip-

But most of all, the companies were protected by the belief widespread in Washington — and aggressively promoted by Fannie Mae and Freddie Mac — that their success was inseparable from the expansion of homeownership in America. That conviction was so strong that many lawmakers and regulators ignored the peril posed to that ideal by the failure of either company.

In October 1992, a brief debate unfolded on the floor of the House of Representatives over a bill to create a new regulator for Fannie Mae and Freddie Mac. On one side stood Jim Leach, an Iowa Republican concerned that Congress was “hamstringing” this new regulator at the behest of the companies.

He warned that the two companies were changing “from being agencies of the public at large to money machines for the stockholding few.”

On the other side stood Barney Frank, a Massachusetts Democrat who said the companies served a public purpose. They were in the business of lowering the price of mortgage loans.

Congress chose to create a weak regulator, the Office of Federal Housing Enterprise Oversight. The agency was required to get its budget approved by Congress, while agencies that regulated banks set their own budgets. That gave congressional allies an easy way to exert pressure.

“Fannie Mae’s lobbyists worked to insure that [the] agency was poorly funded and its budget remained subject to approval in the annual appropriations process,” OFHEO said more than a decade later in a report on Fannie Mae. “The goal of senior management was straightforward: to force OFHEO to rely on the [Fannie] for information and expertise to the degree that Fannie Mae would essentially regulate itself.”

Finally, Congress ordered that the companies be required to keep more capital as a cushion against losses if they invested in riskier securities. But the rule was never set during the Clinton administration, which came to office that winter, and was only put in place nine years later.

The Clinton administration wanted to expand the share of Americans who owned homes, which had stagnated below 65 percent throughout the 1980s. Encouraging the growth of the two companies was a key part of that plan.

Gee, Barney Frank and Bill Clinton.  What is Clinton’s party registration again, I cannot seem to recall?

Near the end of the Clinton administration, some of its officials had concluded the companies were so large that their sheer size posed a risk to the financial system.

In the fall of 1999, Treasury Secretary Lawrence Summers issued a warning, saying, “Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly.”

It was a signal moment. An administration official had said in public that Fannie Mae and Freddie Mac could be a hazard.

-snip-

…the great risk to the profitability of Fannie Mae and Freddie Mac was not the movement of interest rates or defaults by borrowers, the concerns of a normal financial institution. Fannie Mae’s risk was political, the concern that the government would end its special status.

So the companies increasingly used their windfall for a massive campaign to protect that status. 

-snip-

Fannie Mae, and to a lesser extent Freddie Mac, became enmeshed in the fabric of political Washington. They were places former government officials went to get wealthy — and to wait for new federal appointments. At Fannie Mae, chief executives had clauses written into their contracts spelling out the severance benefits they would receive if they left for a government post.

The companies also donated generously to the campaigns of favored politicians. The companies’ political action committees and employees have donated $4.8 million to members of Congress since 1989,

-snip-

In 2003, Richard H. Baker(R-La.), chairman of the House Financial Services subcommittee with oversight over Fannie Mae and Freddie Mac, got information from OFHEO on the salaries paid to executives at both companies. Fannie Mae threatened to sue Baker if he released it, he recalled. Fearing the expense of a court battle, he kept the data secret for a year.

The companies soon faced new bills in both the House and the Senate seeking increased regulation. The Bush administration took the hardest line, insisting on a strong new regulator and seeking the power to put the companies into receivership if they foundered. That suggested the government might not stand behind the companies’ debt.

Wait … the same George Bush the progblogs tell us to blame for all this tried to REGULATE the two companies in 2004?