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Monday, September 22, 2008
It's Not as If We Weren't Warned

In 2006 Senator John McCain told his colleagues, "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." Two years later, well . . .

Everything in real life is more complicated than a blog post, I guess, but I see three major causes for the current financial turmoil, which is clearly rooted in the mortgage industry's meltdown, and is now taking down major investment banks.

First, a lot of people bought more house than they could afford. They and their lenders both took unwise risks. If we have to bail out the borrowers -- a political necessity, perhaps, but not likely an economic one -- I hope we bail out only the ones who are in default on primary residences, where they actually live, not the many speculators who bought houses to flip them when prices went up, then couldn't afford to, because prices went down.

Second, and contrary to the current hue and cry about insufficient federal regulation of the industry, there was regulation that did actual harm. Regulators forced lenders to make cheap loans in areas and demographic groups where the risk was too high, as the price of being allowed to grow their businesses at all.

Third, there really was insufficient oversight of Freddie Mac and Fannie Mae, the gargantuan public-risk-private-profit mortgage companies. Fannie and Freddie paid good money for it, too, and I mean many millions of dollars. Senator Obama says it's all because of the Republican in the White House these last two terms, but the problem is older than that and convincingly bipartisan.

This recent Slate article highlights some of the villains, including several prominent Clinton cronies. These include Franklin Raines, President Clinton's Director of the Office of Management and Budget. As Fannie Mae's CEO, he pillaged to the tune of $90 million. He paid back about $25 million of that in exchange for the dropping of criminal charges. Former Clinton Administration Deputy Attorney General Jamie Gorelick, who tends to show up, in retrospect, only in connection with the biggest disasters -- she helped paralyze US intelligence agencies in advance of 9/11 -- appears in this picture. She walked away with $26 million. In both cases, most of the money came from bonuses awarded based on fraudulent accounting.

The lawmakers who got the biggest campaign contributions in exchange for resisting reforms are mostly -- not nearly all -- Democrats. Here is the Barack Obama connection: Only Democratic Senator Chris Dodd has received more campaign money from Fannie and Freddie, and he's been at it several times longer than Obama. Comparatively, Senator John McCain received a very small amount.

There were warnings enough, and not just recently -- in the Washington Post on May 24, 2006, for example. But attempts to reform Fannie's and Freddie's oversight were blocked by Democrats on Capitol Hill. (To be sure, if the Republicans had been in charge the last two years, they likely would have blocked the reforms, too.) Here, from the Congressional Record, is Senator McCain urging his colleagues on May 25, 2006, to take seriously a bill to reform Freddie and Fannie. In case you're wondering, the bill never got out of committee. (I'm responsible for the boldface type below; the Congressional Record doesn't do boldface.)


Mr. MCCAIN. 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.

Between our two major presidential candidates, in this respect at least, Senator McCain seems to have the better claim on promise of change, while Senator Obama seems to be quite entangled in a big, old problem.

* * * * * * * * *

While we're (sort of) on the subject of people who saw things coming that surprised other people, you may be interested in this Jack Kelly article advocating Governor Sarah Palin as Senator McCain's running mate. He wrote it in June, about three months before McCain's announcement. His crystal ball works better than mine.

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