If you have been successfully bombarded by the Liberal news media, you may believe that the Bush administration and Alan Greenspan were “asleep at the switch.” If you have been listening or reading the conservative new media, then you already know that Conservatives anticipated the collapse of Fannie Mae and Freddie Mac.
Concerned Conservatives included those in the Bush administration. Consider this excerpt from the New York Times, dated September 11, 2003.
The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. (from here)
Conservative activist groups also campaigned for reform. In the Fall of 2004, the Cato Foundation published a paper that said this.
Fannie mae and freddie mac (f&f) are government-sponsored enterprises that dominate the U.S. mortgage market. In a 2003 Journal of Financial Services Research article, I documented that the mortgage related securities directly held by f&f in their retained mortgage portfolios contain very large amounts of interest rate risk; at year-end 2005, the two firms’ retained mortgage portfolios totaled $1.4 trillion. I recommended expanding government regulation of f&f to control that risk.
Since that time, the need for action has been confirmed in two important ways. First, the recent accounting scandals at the two firms arose because the firms had not controlled their interest rate risk. Second, key government officials, including Alan Greenspan, Douglas Holtz-Eakin, and John Snow, have recognized that f&f interest rate risk creates significant systemic risks for the U.S. financial system, and they accordingly have called for regulatory actions. (from here)
The authors of the Cato Foundation paper accept the fact that American polity would not privatize Fannie Mae and Freddie Mac with resignation. In June of 2005, The Heritage Foundation, however, called for the Federal Government to get out of the mortgage lending business.
A better and more effective alternative is to phase out their generous federal credit privileges, allowing these financial giants time to adjust to a more competitive environment. To implement this orderly withdrawal of federal support, Congress should:
- Phase out Fannie Mae’s and Freddie Mac’s lines of credit with the U.S. Treasury over five years in annual increments of $500 million for each government-sponsored enterprise (GSE),
- Eliminate immediately the Federal Reserve’s authority to buy their debt, and
- Eliminate the GSEs’ exemption from state and local income taxes.
As the phaseout proceeds, Fannie Mae and Freddie Mac should:
- Conduct an orderly reduction in their holdings of residential mortgages (the profits from these investments depend largely on their ability to borrow at subsidized rates) and
- Concentrate their skilled workforces on securitizing residential mortgages in fair and open competition with the private sector.
These legislative changes would greatly reduce the risk to financial markets and taxpayer exposure. They would also restore competition in residential mortgage markets while leaving the housing industry and homeownership opportunities unaffected. (from here)
Unfortunately, the opposition disagreed. So none of this happened, and the rest is now unfolding history. The Heritage Foundation put it this way.
Both Fannie Mae and Freddie Mac have proven exceptionally adept at lobbying Congress to preserve and enhance their privileges. Any effort that relies on new regulations will likely perpetuate the risk to the financial market and preserve their dominant influence. Indeed, if Armando Falcon, director of the Office of Federal Housing Enterprise Oversight (OFHEO), had not courageously persisted in exposing Fannie Mae’s suspect operations, often in the face of congressional hostility, former Fannie Mae President Franklin Raines would still have his job and Fannie Mae’s shaky finances and fabricated earnings would still be hidden. (from here)
It would seem that even when the problems WERE KNOWN, Congressional Democrats were still unwilling to do anything.
