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Thursday, September 18, 2008

Republicans Vs. Fannie Mae/Freddie Mac (UPDATED)

Back in 2006, the Democrats effectively used the issue of Jack Abramoff as a bludgeon against Republicans. The truth is that Abramoff had no problem committing corruption by reaching out to Democrats, but Abramoff worked with corrupt Republicans in significantly larger numbers. Democrats used Abramoff as a symbol of the corruption that had engulfed Washington and since the Republicans were in charge, they put the blame on the Republican party.

The dynamic of Fannie/Freddie can work out much the same way. The current financial meltdown is a mortgage meltdown that has spread into a financial services meltdown that threatens to be an economic meltdown. Fannie/Freddie are both at the center of this meltdown and a symbol for it. Make no mistake, both these giants were not only obscenely corrupt, but they had no trouble reaching out to members of both parties to look the other way while they committed their corruption.

In an inverse way though, much like Abramoff himself, Fannie Mae/Freddie Mac worked predominantly with the Democrats. There is plenty of opportunity for the Republican Party, and John McCain specifically, to take advantage of this. Much like Abramoff became a symbol for the corruption that engulfed D.C., both Fannie Mae and Freddie Mac can become a symbol for the corruption and excess that has engulfed Wall Street and threatens our economy. If the Republicans can get on the other side of these two, demonize them, and link their corruption to the Democrats (much like the Democrats did with Abramoff), they can turn the entire election.

There are opportunities on three levels. Three of the biggest beneficiaries of Fannie and Freddie money are Chris Dodd, Barney Frank, and Barack Obama. One is running for President and the other two head their houses respective committee that has oversight of these two giants. How can we have reform if the entire leadership of the party is in the pockets of the corruptors themselves? In less than four years, Barack Obama has received just over $126,000 from these two. Furthermore, former Fannie Mae CEO's Jim Johnson and Franklin Raines are both part of his campaign. He is second only to who has received $165,000 over a much longer period. John McCain has received just over $22,000 in over twenty years on Capitol Hill.

Barney Frank, on the other hand, has his own mess to answer for. In 2003 and for years later, the issue of reforming both came up and here is how he responded.

I do not regard Fannie Mae and Freddie Mac as problems," he said in response to another reform push. And then: "I regard them as great assets."

Great or not, we'll give Mr. Frank this: Their assets are now Uncle Sam's assets, even if those come along with $5.4 trillion in debt and other liabilities.

Again in June 2003, the favorite of the Beltway press corps assured the public that "there is no federal guarantee" of Fan and Fred obligations.

A month later, Freddie Mac's multibillion-dollar accounting scandal broke into the open. But Mr. Frank was sanguine. "I do not think we are facing any kind of a crisis," he said at the time.

Three months later he repeated the claim that Fannie and Freddie posed no "threat to the Treasury." Even suggesting that heresy, he added, could become "a self-fulfilling prophecy."

In April 2004, Fannie announced a multibillion-dollar financial "misstatement" of its own. Mr. Frank was back for the defense. Fannie and Freddie posed no risk to taxpayers, he said, adding that "I think Wall Street will get over it" if the two collapsed. Yes, they're certainly "over it" on the Street now that Uncle Sam is guaranteeing their Fannie paper, and even Fannie's subordinated debt.

Re electing the Democrats means having Frank in charge of Fannie/Freddie oversight. Re electing the Democrats means that the same folks that became far too cozy with these two giants will continue to be in charge of overseeing them. Of course, I can't say it. The Republicans must say it.

John McCain and the Republicans have a much more favorable record when it comes to reforming both these giants. Here is how McCain addressed the issue in 2005 when both Fannie and Freddie were merely obscure but powerful organizations that no one knew o cared about.

Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management,
which resulted in a $10.6 billion accounting scandal.The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.

The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

I urge my colleagues to support swift action on this GSE reform legislation

It's important for McCain to point out that anyone can call for reform after there is a problem. It's something wholly different to identify a problem before it happened. Barack Obama is blaming the last eight years of Republican rule for causing this crisis. Yet, he was in the Senate for four of those years, and he never proposed anything to resolve the crisis that is now occurring. McCain's has a track record of anticipating problems. Again, this isn't merely something I can point, but something that McCain needs to pound over and over.

All of these points must be hammered home over and over in campaign ads, speeches and in debates. Some have complained that Sarah Palin has been making her convention speech over and over on the campaign trail. Well, it's time for her speech to pivot. Now, it's time for Sarah Palin to pound over and over the Democrats, and Barack Obama especially, cozy relationship with Fannie and Freddie, their unwillingness to act in oversight, and also John McCain's record of anticipating this crisis.

This can't be it though. The Republicans must also offer some real solutions. Merely mentioning reform, restructuring, and oversight over and over aren't going to be enough. The reform can't merely be a series of new regulatory bodies that will likely only add to the bureaucracy. The Republicans, and McCain specifically, must present a series of specific reforms that changes these two giants structurally.

First, these two giants are the brainchild of FDR. (actually Freddie Mac was created later but the concept of mortgage securitization being a brainchild of FDR is correct) Democrats have paid allegiance to FDR's big government philosophy for more than half a decade. Fannie/Freddie are the clearest example that in fact the philosophy is inaccurate. The problems with Fannie/Freddie are two fold. First because they are Government Sponsored Entities, they are quasi private and quasi public. That makes their profits private and their losses socialized. This must stop and so these companies must be full privatized and cut loose. Second, because there are two of them, they are essentially monopolies. They must be broken up. They can be broken up according to the standards of Sherman Anti Trust Act. If McCain wants a real bold populist message, how about dusting off that nearly one hundred year old law? If McCain and the Republicans offered these two clear and specific solutions, they would put the Democrats on their heels.

If the economy continues to be the single most important issue, then the Republicans must turn Fannie/Freddie into not only the symbol of everything that is wrong but its nexus, both of which are mostly entirely accurate thoughts. They have the opportunity. They must drill it home in ads, speeches, debates, and in talking points. If the Republicans handles the Fannie/Freddie issue correctly, they will not only elect McCain President but maybe even with one or more of the legislature along with him.

UPDATE: Go after the Obama campaign is exactly what McCain did on Fannie/Freddie. Here is the relevant portion.

Senator Obama talks a tough game on the financial markets but the facts tell a different story. He took more money from Fannie and Freddie than any Senator but the Democratic chairman of the committee that regulates them. He put Fannie Mae’s CEO who helped create this disaster in charge of finding his Vice President. Fannie’s former General Counsel is a senior advisor to his campaign. Whose side do you think he is on? When I pushed legislation to reform Fannie Mae and Freddie Mac, Senator Obama was silent. He didn’t lift a hand to avert this crisis. While the
leaders of Fannie and Freddie were lining the pockets of his campaign, they were sowing the seeds of the financial crisis we see today and enriching themselves with millions of dollars in payments. That’s not change, that’s what’s broken in Washington


Right on cue, McCain is following my advice. Here are two new ads that call for exactly what I asked for.

Now if this is a story, McCain is laying it out well but it is only at the beginning. First, he is laying out that Barack Obama is very cozy with the problem. Next, he needs to point out his own record in trying to confront the problem. Yet, he still needs to define why Fannie/Freddie are such a problem. Finally, he needs to offer specific solutions. Expect more ads to accomplish the rest of the goals.


Anonymous said...

Good lord man, if you had any clue as to how both of the GSE's work you wouldn't rant like you are here. The GSE's were NOT the problem. Did they lobby Congress heavily? Sure did, just like Exxon, the NRA and many other entities where the list can go on and on. One of the lobbyists for the GSE's was McCain only campaign manager. The GSE's do not originate mortgages. The mortgage originators were the problem, along with the corrupt appraisers and guess what, the American consumer who knowingly lied upon their mortgage applications and who bought homes they knew they couldn't afford. The whole country played the game one way or their other, with homes, home equity,and credit cards. The whole mess can be traced straight back to the consumer, who, as a whole in the US, has been spending more than they earn for the past several years. The whole uptick in the economy in the past few years was based on a house of cards. We now have to pay the piper. Blaming this whole mess on the GSE's is nothing more than cold political posturing which is at the least disingenuous showing no knowledge at all about how the US housing market works and how the market for mortgages works. It also conveniently overlooks the fact that up until January 2006, the GOP was in control of the Presidency and BOTH houses of Congress. The whole housing bubble started long before January 2009. Nice of you to conveniently leave out that fact. We are in a deep, deep mess and need a unified response to get us out of the mess. Blogs like yours do not help and only result in a further splintering of the political debate. The days of partisan political bickering need to STOP and stop now before we are in for a lengthy depression that I think no one wants, not even political hacks. We have been running down the ruin to financial ruin for years. The oil embargo and the first great depression taught us nothing. The country kept going on a consumption binge which will take a few years to recover from. Are the politiicans to blame. Damn right they are but the ultimate blame lies with the people who elect the same idiots from both parties over and over again and who fail to demand an intelligent debate on the issues. Frankly, blogs like yours don't help and only contribute to the cesspool that our politics has become.

mike volpe said...

Good lord man, I am in the mortgage business, and this piece was strictly about political strategy not policy. I didn't ever blame Fannie Freddie for starting this since they specialize in loans for good borrowers. I specifically said they could be used as a SYMBOL of the excess and that they deserve the demonization they would get. Both of which are true. what's truly ironic is that everything you claim I don't know I actually wrote in this piece.

Furthermore, I wrote an extensive summary of the dynamic that lead us here in this piece...

I do appreciate the tedious and long winded explanation of how my business works. After nearly seven years, I get so confused.