A Little Glimpse

Most people -- apart from young idealists and other naive souls -- have some sense of how things work in Washington: Money talks and everything else walks. Despite all the "rules" that are supposed to keep things fair and honest, a lot goes on and gets done that is clearly not in taxpayers' interests. In a call-a-spade-a-spade editorial, "Fannie and Freddie's Enablers," the Wall Street Journal offers a glimpse of the kinds of shenanigans that have helped transform America's largest mortgage lenders into timebombs-in-the-making.

You'll love this one. In the strange accountability of Washington, the same folks who put taxpayers on the hook for Fannie Mae and Freddie Mac are now demanding ransom to let taxpayers bail them out. It's as if Andy Fastow insisted that Enron shareholders pay his fines after his fraud cost them their life savings.

"I don't know how in good conscience you come up here and ask me to give unlimited lines of credit" to Treasury for Fannie and Freddie without giving Democrats something in return, Senate Banking Chairman Christopher Dodd (D., Conn.) told the Journal last week. Come again? This is the same Chris Dodd who long resisted tougher regulation while more recently handing Fan and Fred even more room to expand their risk-taking.

At a February hearing, he derided critics who he said were "repeatedly raising alarm bells about the risks Fannie and Freddie pose to the financial system." You may also remember Mr. Dodd as the fellow who got a sweetheart mortgage from former Countrywide Financial CEO Angelo Mozilo, who was thick as thieves with Fannie Mae.

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In any other business, Mr. Dodd would be begging forgiveness. But in Washington he now wants the Bush Administration to bow to his political wishes in return for protecting the financial system from the risks that Mr. Dodd long claimed Fan and Fred didn't pose. His demands include nearly $4 billion in Community Development Block Grants that are a payoff to liberal interest groups. He also wants an "affordable housing trust fund" for more such largesse that could take as much as a $1 billion a year out of Fan and Fred even as they struggle to stay solvent.

Meanwhile, another leading cause of this fiasco, House Financial Services Chairman Barney Frank, has his own demands. He wants to increase the size of the loans Fannie and Freddie can purchase and package as mortgage-backed securities (MBSs), which would allow them to grow market share. Earlier this year he pushed for, and got, a temporary increase in the so-called conforming loan limit to $729,250, allowing Fan and Fred to buy and securitize jumbo loans. Now he wants to make that increase permanent.

Behind the scenes, Mr. Frank is also demanding that the new, more powerful regulator for Fan and Fred not get up and running until next year, though the companies are in trouble right now. Like the management of Fan and Fred, he's assuming an Obama Administration will go easier on the mortgage giants than will the Bush Treasury.

We should add that Republicans aren't much better. A few in the Senate -- Richard Shelby, Elizabeth Dole, John Sununu, Mel Martinez -- fought hard to protect taxpayers going back years. But most of the House GOP has long been in Fannie's back pocket. On May 22, 2007, it was Texas Republican Randy Neugebauer who sponsored an amendment to water down systemic risk protections for Fan and Fred. It passed 383 to 36, with 162 Republicans voting with the companies. Now these same Republicans claim to be appalled by this taxpayer rescue. What a spectacle.

The real priority ought to be protecting taxpayers in return for bailing out these vehicles of Capitol Hill privilege. Taxpayers have already coughed up once, in the form of Treasury Secretary Hank Paulson's explicit pledge last week to save the companies and let them tap the Federal Reserve's discount window. Now taxpayers are being asked to pay again, via legislation allowing the government to increase its credit line to the companies and to inject capital if needed to save them from failure.

For all of that, taxpayers have so far received nothing -- no stock warrants, no discipline for the management or shareholders of Fan and Fred, no guarantee that the companies won't pocket this bailout and emerge even more powerful down the road. At least Bear Stearns went out of business when it had to be saved by Uncle Sam.

Instead, taxpayers are being asked to trust that a regulator will do the right thing and impose some discipline on the companies after Mr. Paulson's rescue bill passes. But at the same time, Mr. Paulson is saying that the goal is to preserve Fannie and Freddie "in their current form." That sounds a lot like a get-out-of-bailout-free card.

Perhaps this is part of Mr. Paulson's strategy to get the legislation passed without Fan and Fred opposing it. And in its current form the bill would give a new regulator the power to fire managers and put the companies into receivership in certain circumstances. At a minimum, however, the regulator should be given an explicit command to run down their portfolios of MBSs that have made them such risky monsters. And as the credit markets calm down, the regulator needs to limit their business so private-label mortgage securitization takes a greater role in the market and less risk is concentrated in two giant firms. Mr. Paulson should also support Senator Jim DeMint's proposal to bar the companies from the lobbying and campaign contributions that have allowed them to buy political immunity all these years.

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If Mr. Paulson can't get a regulator who can rein in these two -- and put them into receivership if they require taxpayer money -- he should put the political blame squarely on Fannie and Freddie's enablers in Congress.

They made this mess by creating these beasts that combine private profit with public risk. And they made the mess worse by fighting, over many years and despite accounting fraud, any limits on the ability of the companies to grow with taxpayer subsidies. Mr. Dodd and Congress owe Americans an apology, not more ransom demands.

Comments

[weinerdog43]

Sorry, not interested in what "The Wall St. Journal" has to say anymore than I would care what Lyndon LaRouche has to say. They have zero credibility and are nothing more than a bunch of wingnut whores.

[Tim]

The United States is the financial crack head of the world. Debt is our crack and we're running out. Shame on anyone who voted for this weasel Dodd.

[Boom2Bust.com]

I would not want to be in Dodd's or Frank's shoes, or any American politician's shoes for that matter. The financial storm is growing, and I suspect history (as well as the American people) will not be kind to these individuals...