Fannie Mae & Freddie Mac: “Just the Facts, Ma’am”

Previously, I looked at the systemic roots of the current economic crisis. Today, let us look at the near-term causes of why we are being asked to foot an additional $700 billion bailout of our credit markets. Everyone seems to be ignoring or has already forgotten that the taxpayers have already incurred a $780 billion bailout in the last two weeks when the federal government took over Fannie Mae and Freddie Mac [M&M].

Every economist agrees that the need for a second bailout, this time of Wall Street, is the direct result of the housing bubble and the risky lending behind it. That lending was fueled by and supported by M&M. Before the Federal government was forced to take over M&M a few weeks ago, they owned or guaranteed “about $5.2 trillion worth of mortgages,” according to The Wall Street Journal. About 15 percent or $780 billion are in very risky “Alt-A” and sub-prime loans.

How and why did M&M get away with those kinds of risky business practices when they are government-sponsored entities, supposedly regulated by Congress? Well, M&M bought their protection from scrutiny.

M&M, over the past ten years, have spent over $200 million in lobbying expenses and campaign contributions to buy influence in Congress and protect them from stronger regulation. For the 2008 elections, they have contributed over $2 million to House and Senate members, according to the Center for Responsive Politics.

Who have been the beneficiaries of this largesse from M&M? Between 1989 and 2008, the top recipients of campaign contributions from M&M have been:

#1 Christopher Dodd received $165,400 ($116,900 from individuals and $48,500 from Political Action Committees)
#2 Barack Obama received $126,349 ($120,349 from individuals and $6,000 from PACs)
#62 John McCain who received $21,550 (all from individuals)
[Source: Center for Responsive Politics, The St. Petersburg Times PolitiFact Check http://www.politifact.com/truth-o-meter/statements/727/ and http://www.audacityofhypocrisy.com/2008/09/18/all-recipients-of-fannie-mae-and-freddie-mac-campaign-contributions-1989-2008/]

Why was Sen. McCain dead last among all Congressional recipients of M&M contributions? Sen. McCain joined Sen. Elizabeth Dole [R-NC] and Sen. John Sununu [R-NE] to co-sponsor the Federal Housing Enterprise Regulatory Reform Act of 2005 [S.190] authored by Sen. Charles Hagel, [R-NE]. This bill would have improved regulations on “secondary mortgage market enterprises” or M&M. In support of this legislation, Sen. McCain spoke on the Senate floor on May 25, 2006:

Mr. President [of the Senate], 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.

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.

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. [emphasis added]

[Source: The Congressional Record http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190]

The Federal Housing Enterprise Regulatory Reform Act of 2005 passed the House of Representatives but was killed in the Senate by the Senate Banking Committee, chaired by Sen. Christopher Dodd [Democrat]. M&M’s contributions to Dodd, who received more than any other member of Congress, paid off handsomely by staving off stricter control and oversight by Congress.

The Democrats in Congress have repeatedly fought off Republican efforts to reform M&M. President Bush had proposed similar reforms in the previous Congress. “Democrats in Congress have sought to preserve the quasi-governmental status of the mortgage giants, seeing Fannie Mae and Freddie Mac as places to locate former top Democratic Party operatives, where they have earned millions in compensation, despite a continuing series of financial scandals.” [Source: Jerome R. Corsi, ”Fannie Mae, Freddie Mac execs now offering advice to Obama Senator's links to mortgage giants also include campaign contributions,” WorldNetDaily, September 17, 2008 http://www.wnd.com/index.php?fa=PAGE.view&pageId=75586]

During the current election cycle, Fannie Mae has given 56 percent of their total $1.1 million in contributions and Freddie Mac has given 53 percent of its $555,700 in contributions to Democrats.

“Fannie Mae and Freddie Mac have also strategically given more contributions to lawmakers currently sitting on committees that primarily regulate their industry. Fifteen of the 25 lawmakers who have received the most from the two companies combined since the 1990 election sit on either the House Financial Services Committee; the Senate Banking, Housing & Urban Affairs Committee; or the Senate Finance Committee. The others have seats on the powerful Appropriations or Ways & Means committees, are members of the congressional leadership or have run for president."

[Source: Open Secrets.org http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html]

Why would M&M give over $126,000 to a freshman Senator, Barack Obama? It is remarkable that in a mere four years Sen. Obama outstrips all but Sen. Dodd in total funds received from M&M over a twenty-year period. Is it because M&M expects a President Obama would continue the Democrats’ protection against reform of the financial markets?

Three of Sen. Obama’s top advisors were former M&M executives: Franklin Raines, James Johnson, and Jamie Gorelick. Raines, budget director under President Clinton, was CEO of Fannie Mae from 1991 to 1998. He earned $21 million during his last year there. Johnson was a former aide to Vice President Walter Mondale and the successor to Raines as Fannie Mae’s CEO from 1999 to 2004, earning $90 million.

“Even after he left, Fannie continued to pay him an annual fee of at least $300,000 a year for consulting services and a $71,000 monthly pension, according to filings with the Securities and Exchange Commission… Fannie also paid for Johnson’s support staff, communications services and provided him a car and driver.”

[Source: Lisa Lerer, “Fannie, Freddie spent $200M to buy influence,” Politico, July 16, 2008 http://www.politico.com/news/stories/0708/11781.html] Gorelick, Clinton’s deputy attorney general, was vice chair of Fannie Mae from 1998 to 2003. He earned $26 million in that role.

All three were involved in various scandals and questionable accounting practices while at Fannie Mae, according to reports from The Washington Post and The Associated Press. Raines is Obama’s advisor on housing. He had to return $15.6 million in Fannie Mae stock options in a settlement negotiated with the Securities and Exchange Commission (SEC). “Until a controversy concerning an alleged $7 millions in questionable real estate loans he received on favorable terms from failed sub-prime mortgage lender Countrywide Financial surfaced and forced him to step down,” Johnson led Obama’s vice presidential selection committee. Gorelick was accused of conflict-of-interest while serving as a member of the 9/11 Commission in 1995 when she attempted “to establish barriers that barred federal anti-terrorist criminal investigators from accessing various federal records and databases that may have assisted them in their criminal investigations.” Dean and professor of law at Harvard Law School Elena Kagan and others have said Gorelick is Obama’s choice for Attorney General if he wins the election. [Source: http://www.wnd.com/index.php?fa=PAGE.view&pageId=75586]

To be fair, Sen. McCain’s campaign manager Rick Davis is a former lobbyist for M&M. Arthur B. Culvahouse Jr., McCain’s vice presidential search committee head, was a former employee. Questioned about these links, McCain’s economic adviser Douglas Holtz-Eakin responded, “Sen. McCain has favored GSE reform in the past and continues to favor GSE reform. That’s unchanged.” [Source: op.cit.]

Commentator and reporter John Gibson in a recent interview with Heather Nauert put these issues in perspective. He said:

“Freddie and Fannie used huge lobbying budgets and political contributions to keep regulators off their backs…Fannie and Freddie have been creations of the congressional democrats and the Clinton White House, designed to make mortgages available to more people, and as it turned out, some people who couldn’t afford them. Fannie and Freddie have also been places for big Washington Democrats to go to work in the semi-private sector and pocket millions…Now remember, Obama’s ads and stump speeches attack McCain and Republican policies for the current financial turmoil. It is demonstrably not Republican policy and worse, it appears the man attacking McCain, Senator Obama, was at the head of the line when the piggy’s [sic] lined up at the Fannie and Freddie trough for campaign bucks. Senator Barack Obama, number two on the Fannie/Freddie list of favored politicians after just four short years in the Senate. Next time you see that ad, you might notice he fails to mention that part of the Fannie and Freddie problem.”
[Source: Ed Morrissey, “McCain’s attempt to fix Fannie Mae, Freddie Mac in 2005; Obama can’t get AIG right,” HotAir, September 17, 2008 http://hotair.com/archives/2008/09/17/mccains-attempt-to-fix-fannie-mae-freddie-mac-in-2005/]

Those are the facts. You decide which candidate -- Sen. John McCain or Sen. Barack Obama -- is most likely to reform our financial system as President.