Economics

How Freddie and Fannie Slipped the Noose Earlier in the Century…

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The AP has an interesting story about how mortgage giants Freddie Mac and Fannie Mae worked to rebuff attempts to reduce the gambles they were taking with taxpayer-backed funds:

Freddie Mac secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse.

In the cross hairs of the campaign carried out by DCI of Washington were Republican senators and a regulatory overhaul bill sponsored by Sen. Chuck Hagel, R-Neb. DCI's chief executive is Doug Goodyear, whom John McCain's campaign later hired to manage the GOP convention in September….

In the midst of DCI's yearlong effort, Hagel and 25 other Republican senators pleaded unsuccessfully with Senate Majority Leader Bill Frist, R-Tenn., to allow a vote.

"If effective regulatory reform legislation … is not enacted this year, 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," the senators wrote in a letter that proved prescient….

In the end, there was not enough Republican support for Hagel's bill to warrant bringing it up for a vote because Democrats also opposed it and the votes of some would be needed for passage. The measure died at the end of the 109th Congress.

I'm not sure what "secretly paying" means in this context and the AP story is unfortunately wrapped in a partisan blanket (the story is big on the connection between McCain and DCI personnel, despite the fact that McCain signed Hagel's letter).

There's no question that the Republicans behaved abysmally during their time controlling the Congress and the White House. They should have done what Hagel suggested or more to cut the FMs loose. But the Dems did nothing either, except possibly push for no action at all:

Democrats did not like the harshest provision, which would have given a new regulator a mandate to shrink Freddie Mac and Fannie Mae by forcing them to sell off part of their portfolios. That approach, the Democrats feared, would cut into the ability of low- and moderate-income families to buy houses.

The political backdrop to the debate "was like bizarre-o-world," said the second of three people familiar with the program. "The Republicans were pro-regulation and the Democrats were against it; it was upside down."

Look past the partisan stuff and read about how lobbying works in DC and I think all but the most hardened ideologue will agree that the Fannie Mae/Freddie Mac story perfectly exemplifies why the government should not be in the business of backing particular entities (yeah, yeah, implicitly!).

Read the whole story here.

And as you ponder the government getting more and more intricately involved in the actual ownership (not just the regulation, which they've shown virtually no talent for) of all sorts of financial institutions, remind yourself as the Dems get ready to lock down control of the White House and Congress for the first time in over a decade of Rep. Barney Frank's behavior in all this. As U.S. News' Sam Dealey wrote a month ago:

Five years ago, there was one of those rare moments in Washington when the branches and personalities of government-in this case, the Bush administration-are less interested in protecting or expanding their turf than in fixing a looming catastrophe. What was Frank's response to the proposal?

"These two entities-Fannie Mae and Freddie Mac-are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

As Frank mentions in his press release today, two years after it was first proposed, the House finally voted on a bill reforming the mortgage giants. Alas, the legislation was watered down to the point of being meaningless-that's why it passed the House with such wide margins (122 Democrats and 209 Republicans). But even then, and despite his high regard for bipartisanship now, Barney Frank wasn't among the yeas.

More here.

It will be good come November to see the Republicans get the ass-kicking they so richly deserve. It will be bad to see what comes next.