The sordid history of Fannie & Freddie
Fannie Mae, the Federal National Mortgage Association (FNMA), was established in 1938 to make home mortgages more affordable to people with lower incomes – part of FDR’s New Deal. (more here) Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC), was established in 1970 to compete with Fannie Mae and expand the market for such mortgages. (more here) Both were begun as Government Sponsored Enterprises (GSE – more here), which are supposed to be publicly-traded corporations with government backing and regulation. In September 2008 the federal government, citing massive unfunded liabilities and gross mismanagement, placed the two GSEs into federal conservatorship – essentially putting the taxpayers on the hook for over $800B in bad debt.
Congress has started to investigate what caused our financial crisis and several former Fannie executives have appeared before the Financial Crisis Inquiry Commission to explain their roles in this disaster. (story here) Predictably, their testimony runs the gamut from, “Ooops, we screwed up, we’re sorry” to “It wasn’t our fault, the government made us do it.” (more on that here) While congress grills these hapless former execs, the real scoundrels will very likely skate. These two entities may have been created with good intentions but, as this piece (from James Poulos at Pajamas Media) describes, they became a spoils system for political fat cats, cronies, and apparatchiks.
Last Tuesday, Rep. Barney Frank (D-MA) finally got around to it. With Treasury Secretary Tim Geithner as the guest star, the House Committee on Financial Services convened to ponder “the future of housing finance” — specifically, how to clean up in the aftermath of the collapse of Fannie Mae and Freddie Mac. So-called government-sponsored enterprises, or GSEs, Fannie and Freddie have now drained hundreds of billions of taxpayer dollars with no end in sight.
But while the GSEs went belly-up, costing Americans dearly, the fortunate few sitting on their Boards of Directors got filthy rich. These same directors — some of the biggest names in Democratic Party politics and business — failed spectacularly to fulfill their fiduciary obligations.
As it turns out, former President Clinton packed the boards of Fannie Mae and Freddie Mac with virtually as many personal allies and beneficiaries as they could hold. The most visible was Franklin Raines — Fannie Mae chairman, CEO, and former Clinton budget chief — who later resigned in disgrace with a multi-million parachute.
And then there’s President Obama’s current White House Chief of Staff Rahm Emanuel, who served on Fannie Mae’s board for a mere 14 months and raked in a cool $320,000.
Clinton also packed the Fannie board with Democratic Senator and “Keating Five” defendant Dennis DeConcini. Hillary Clinton’s confidante Jamie Gorelick got a prized seat, as did Bill and Hillary favorite Harold Ickes, Democratic strategist.
Under their stewardship accounting scandals and campaign finance abuse cost the two entities hundreds of millions of dollars in fines. Yet the appointed executives managed to leave with millions in golden parachutes. In other words they plundered Fannie & Freddie for their own personal and political gain.
While our dear comrade leader is not necessarily to blame for this mess, he certainly doesn’t appear to have learned from it. Some of his top financial advisers have participated directly in the plunder. So is there any reason to believe he or congress are really serious about truly fixing this mess?
President Obama can hardly be blamed for the economic disaster handed him by the masters of the Clinton universe. But the daunting task of recovery and reform will be made all the more vexatious by Obama’s reliance on more than a few of those same powerful cronies, from Emanuel to Hillary Clinton herself. Their reach into Chicago politics, where Obama ostensibly enjoys a home-court advantage, is long and deep, and their influence on Democratic politics remains profound. Despite Secretary Geithner’s tacit admission that Clintonistas like Cuomo, Emanuel, and the rest are responsible for the current crisis, President Obama may find it politically impossible to purge his administration — and the Democratic Party itself — of their influence.
On March 29, writing in Forbes magazine, Editor-in-Chief Steve Forbes warned that when Washington finally gets around to dealing with Fannie and Freddie, politicians will loudly proclaim that they will truly reform these entities to prevent another disaster,” passing the toughest regulations yet. But this pledge “will come at a price. To appeal to voters, Congress will pressure the new Fannie and Freddie to make it easier for constituents to get mortgages. In turn, the ‘reformed’ companies will know they couldn’t long survive free-market competition without that ultimate backstopping from Uncle Sam. As before, congressional relatives, former staffers and retired pols will find lucrative perches in these companies or their affiliates.”
Having learned a painful lesson from the Bush years, Republicans are at work centering the party around opposition to the transformation of ever-wider sectors of the economy — from the automotive industry to the nation’s health care — into new Fannies and Freddies. The lesson Obama Democrats seem to have learned from the recklessness and malfeasance of the Clinton years is much different: if you can’t beat ‘em, join ‘em.