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Regulating Fannie and Freddie
Historian John Steele Gordon asks: Who is going to regulate the politicians in Washington who put their own interests ahead of the country's?
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Kai Ryssdal: It's gonna be years yet before the effects of the financial crisis work their way out of the economy. Same can well be said for the justice system, too.
On Friday, the Securities and Exchange Commission charged the former CEOs of Fannie Mae and Freddie Mac for their role in the subprime mortgage scandal. They're accused of intentionally understating how exposed Fannie and Freddie were to mortgages we now know were bound to go bad. Those losses led to the government takeover of Fannie and Freddie and a call for more regulation of the financial industry.
But commentator and business historian John Steele Gordon says there's still unanswered questions.
John Steele Gordon: Fannie Mae started out as one of the New Deal's better ideas: a means of freeing up the mortgage money banks could lend so that more people could become home owners instead of renters. It did exactly that for more than 30 years. Tens of millions of families joined the middle class.
But in 1969, Lyndon Johnson sought to make the federal deficit look smaller. He spun Fannie off as a so-called "government-sponsored enterprise." Together with its baby brother, Freddie Mac, it then slowly morphed into a monster that devoured American prosperity. By 2007, Fannie and Freddie held or guaranteed $6 trillion in mortgages. That's an unprecedented concentration of risk.
What happened? Simple: Politicians prevented the proper regulation of Fannie and Freddie in pursuit of short-term and partisan political advantage. They made a fantasy home ownership for everyone sound like good public policy.
Fannie and Freddie were, in theory, independent corporations. They were listed on the New York Stock Exchange. But real corporations can go broke -- just ask the stockholders of Lehman Brothers and Bear Stearns -- but everyone knew that the government in the last resort would stand behind these government sponsored enterprises. And it did.
Here's something that's vital to understand. Fannie and Freddie had their very own set of regulators -- just for them. The Office of Federal Housing Enterprise Oversight allowed them to take on ever more risk, while their top executives cooked the books to ensure big bonuses for themselves. They hired lobbyists by the hundred, and made large, and often illegal, political contributions. Banks knew they could off-load to Fannie and Freddie much of the risk in giving mortgages to people with dubious credit and they began to do so with a vengeance.
Yes, the Dodd-Frank bill regulates the banks. But who is going to regulate the politicians in Washington who put their own interests ahead of the country's? The law doesn't do that at all. Indeed, Dodd-Frank doesn't even mention Fannie and Freddie.
Ryssdal: John Steele Gordon's most recent book is called "Empire of Wealth." Got a comment? Write to us.
hughsansom is on the right track. Mr Gordon obviously does not understand what caused the financial crises. Wall Street banks were hungry for mortgages. They lowered their standards on mortgage underwriting. Which led to the bulk of the subprime loans. In order to compete with Wall Street GSE's had to do the same. Nothing that congress or the GSE's did led to this crises, they simply followed along. The same events occured in Austrailia, Ireland, Spain and other countries where U.S. GSE's had no part. Market Place presents this article in a way that it is factual it is not by any means.
I agree with hughsansom. Marketplace in general seems obsessed with Fannie & Freddie without ever acknowledging what the bi-partisan Levin-Coburn Report found, namely that investment bank securitization led to degradation of underwriting standards and that the GSEs followed rather than led this crisis-producing trend.
Alas, it seems the rich & powerful have undermined even "public" media, which means that most of us won't know the truth about anything until it's too late.
With regard to last night's commentary about the GSE's, Mr. Gordon left something important out of the following assertion:
"...But real corporations can go broke -- just ask the stockholders of Lehman Brothers and Bear Stearns -- but everyone knew that the government in the last resort would stand behind these government sponsored enterprises. And it did."
In fact, Freddie Mac shareholders were wiped out under conservatorship. Freddie Mac's draws under the senior preferred agreement with the Treasury maintains the company's postive net worth so it can continue to buy and securitize home loans while Congress debates a framework for a different housing finance system. To date, Freddie Mac has drawn $72 billion under this agreement and in return has provided more than $1.2 trillion in mortgage credit to finance housing for more than 5.8 million families (that’s one out of four home mortgages). We have also paid the Treasury $14.9 billion in dividends.
But, one thing the Treasury agreement didn't do was support the shareholders. As I said, they were wiped out.
Brad German
Senior Director, Public Relations
Freddie Mac
Maybe Bear Stearns did go bankrupt. But it's not exactly like your neighbor store bankruptcy. Didn't the NY Fed give Chase Morgan a 30 billion non-recourse loan to buy Bear Stearns. Maybe some of Bear Stearns lost money. But Jamie Dimon and his crew at Chase Morgan got a pretty good deal.
I'm a casual admirer of Mr. Gordon and enjoy his occasional remarks during Marketplace. However I question his facts regarding Lyndon Johnson's role in spinning off Fannie Mae "in 1969": Lyndon Johnson was President for about three weeks in 1969, with Congress up and running for about two of those.
If it truly was the LBJ administration who fomented the Fannie Mae spin-off then the bulk of the effort had to have been completed by 1968; if it truly happened in 1969 then it seems much of the credit/blame for this effort should be placed with Ol' Tricky Dick's administration.
The distinction between these two administrations is not trivial so clarification by Mr. Gordon would seem to be in order; a Wikipedia author of its Fannie Mae article attributes the move to the Johnson Administration but in 1968.
"Real corporations can go broke"??? The way AIG, Citigroup, Goldman Sachs, Bank of America did?
John Steele Gordon has to get his facts right -- especially if all he is going to do is parrot right-wing talking points. The heart of the crisis was not in Fannie or Freddie; it was in the Wall Street banks that are still flying high because of right-wing and moderate Republican and Democratic determination to line the pockets of the most powerful industry in the world today — finance.
