Fannie Mae and Freddie Mac – The Voldemort(s) of the Financial Crisis
January 29, 2010
by: Leslie Paige

Wastewatcher, January 2010

On January 13, 2010, the Financial Crisis Inquiry Commission (FCIC) launched a year-long probe on the financial crisis with two days of hearings, starting with testimony from the CEOs of Bank of America, Goldman Sachs, JP Morgan Chase, and Morgan Stanley.  It is not clear whether the hearings and the subsequent report will be an authentic “teachable moment” or just another in a long line of show trials masquerading as serious congressional inquiries, but the early signs don’t look promising.

Knowing that the bankers would be in Washington, the Obama administration timed its announcement of a big new tax on banks to coincide with the hearings.  And the Sunday, January 10th appearance by White House Council of Economic Advisers Chair Christina Romer on ABC’s “This Week with George Stephanopoulos,” in which she bashed the bank executives over their compensation and bonuses, also deliberately orchestrated as part of the administration’s desire to lay all the blame for the economic meltdown at everyone else’s feet.

Administration policy vis-a-vis the investment bankers has been schizophrenic.  In one breath, they publicly bludgeon them as greedy fat cats, in the next breath administration officials are cajoling them to do more to rescue the economy by loosening their credit requirements in order to make more loans.  House Financial Services Committee Chairman Barney Frank (D-Mass.), frequent bloviator about executive compensation and reliable purveyor of class warfare, opined that Congress absolutely must levy new taxes and impose new regulations because the banks continue to pay executive bonuses, saying it’s “outrageous” for them to complain. 

Rep. Tom Price (R-Ga.) put it perfectly when he said “It’s not every day the leader of the free world blames you for a problem and then tells you to do the exact same thing that caused the problem.” 
 
According to CNBC’s Charles Gasparino, during a December, 2009 dressing-down session that President Obama hosted, J.P. Morgan Chase Chairman and CEO Jamie Dimon reportedly interrupted to explain to All The President’s Men that the reason small businesses were hoarding cash and shying away from taking out new loans is because they are unsure of what the administration and Congress has in mind for them.  Will there be tax cuts or tax increases?  Will there be new regulations imposed from on high?  What about healthcare mandates?  A plague of locusts, perhaps? 

Gasparino, writing in the New York Post, quoted someone familiar with the grilling describing Dimon telling President Obama that “many businesses simply don’t want to borrow to expand their operations and hire more workers…Jamie basically said the demand for loans is way down because businesses, particularly those that are making money and can qualify for loans, simply don’t want to borrow.”

It is time to verbalize the name, or names, in this case, that are never spoken aloud by the Obama administration nor Democrats on the Hill – the Voldemort(s) of the financial crisis, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

It is no wonder that the Frank and Romer would rather stoke bank hatred.  Protected and cosseted by Congress (Frank was their #1 Sugar Daddy) for decades, Fannie and Freddie (sub)primed the mortgage market until it was as bloated and gaseous as the Heene family balloon in Colorado, and just as much of a hoax.  New analysis by former chief credit officer for Fannie Mae and housing expert Edward Pinto reveals that the true value of the mortgages being bought by the two companies for many years, as they were permitted to amass trillions of dollars in mortgage-backed securities, were being systematically misrepresented as far back as the 1990s.   

Congress laid the groundwork for the collapse of Fannie and Freddie through subsidized housing policies and ill-considered affordable housing goals.  Then the GSEs went belly-up and taxpayers are now left to clean up the unholy mess.  On Christmas Eve, the Treasury Department, which now has the GSEs under conservatorship, surreptitiously eliminated the $400 billion lending cap on the two bankrupt companies, which means that taxpayers are now on the hook for an unlimited portion of the trillions in liabilities on the GSEs’ balance sheets. The U.S. Treasury also agreed to pay the executives of these failed behemoths, who are essentially government employees now, $42 million in executive compensation and bonuses.  The GSE-loving hypocrites in Congress continued to rail about private-sector bank bonuses while remaining silent about Fannie and Freddie.

In January, 2010 the CBO released a report on the budgetary treatment of Fannie and Freddie in which it stated the following: 

Despite having a unique legal status and a long history linking them to the federal government, Fannie Mae and Freddie Mac have been considered private firms owned by their shareholders.  However, with the entities facing substantial losses that threatened their solvency, the government took control of Fannie Mae and Freddie Mac through its authority under the Housing and Economic Recovery Act of 2008 (HERA).  The federal government now exercises an extraordinary degree of management and financial responsibility over them.  CBO believes - consistent with the principles outlined in the 1967 Report of the President’s Commission on Budget Concepts - that it is appropriate and useful to policymakers to account for and display the entities’ financial transactions alongside other federal activities.  In the baseline budget projections it published in 2009, CBO accounted for the cost of the entities’ operations in the federal budget as if they were being conducted by a federal agency.  That is, CBO treated the mortgages owned or guaranteed by Fannie Mae and Freddie Mac as loans and loan guarantees of the federal government.  The operations of Fannie Mae and Freddie Mac added $291 billion to CBO’s August baseline estimate of federal outlays for fiscal year 2009 and $99 billion to the spending projected for the 2010–2019 period.

CBO went on to describe the position taken by the Obama administration:   

The Administration has taken a different approach to recording the impact of Fannie Mae and Freddie Mac on the federal budget.  Following the enactment of HERA, the Treasury signed agreements with the two entities intended to ensure that they could continue to support the mortgage market.  In exchange for making direct cash infusions into the entities, the Treasury received shares of their preferred stock and warrants to purchase their common stock.  The Administration’s Office of Management and Budget (OMB) continues to treat Fannie Mae and Freddie Mac as outside the budget, and it records and projects outlays equal to the amount of those cash infusions. 

As a result, the Administration has not included in its budget figures subsidy costs that would be directly comparable to CBO’s $291 billion estimate of subsidy costs in 2009.  Instead, because the Treasury provided a total of $95.6 billion in cash outlays to the two entities in fiscal year 2009, the government’s final report of spending for 2009 included that amount, which is similar to CBO’s August 2009 estimate of cash infusions for that year ($112 billion). OMB has estimated that cash outlays from the Treasury to the two entities will total another $65 billion over the 2010 - 2019 period.

So far, the FCIC has not listed any representatives from either Fannie Mae or Freddie Mac, current or past, on its future witness lists.  President Obama (who, as a U.S. senator, was among the largest recipients of GSE donations) faced the nation during the State of the Union Address and persisted in his quest to demonize the nation’s banks; at no time did the words Fannie Mae and Freddie Mac pass his lips.
  
If the administration won’t even come clean about what the GSEs are costing now, taxpayers will have little confidence that the FCIC will get to the bottom of what triggered the economic crisis.  Any commission dedicated to uncovering the truth must explore and expose the role of congressional housing policies and oversight negligence in regard to Fannie and Freddie.  Everything else, including stoking populist rage against the banking industry, is just a diversionary tactic.