Ignoring Fannie and Freddie Rewards Incompetence, Corruption

Published November 4, 2010

Can we agree that incompetence and corruption should not be rewarded?

If so, shouldn’t we then ask why the 190,000-word financial regulatory overhaul bill President Barack Obama recently signed says nothing about Fannie Mae and Freddie Mac?

These two government-created mortgage behemoths played a huge part in creating the housing bubble that burst and helped tank the economy. Yet they’re being allowed to go their merry way.

Fannie and Freddie have consumed more than $160 billion of taxpayer bailout money since 2008, and hundreds of billions of additional bailout dollars could be coming. Up until the moment Fannie and Freddie teetered on the edge of collapse in 2008, there were no government guarantees of their losses.

In the meantime, we’ve learned more than 150 Fannie and Freddie employees received below-cost loans from Countrywide Financial and then put thousands of Countrywide’s bad loans onto Fannie’s and Freddie’s books, which means onto the backs of taxpayers.

Years before that revelation, though, we knew of the criminal and irresponsible conduct of Fannie and Freddie. As the two companies inflated the housing bubble, scandals over accounting gimmicks boosting the pay of their executives came to light.

“Freddie Mac cast aside accounting rules, internal controls, disclosure standards, and the public trust in the pursuit of steady earnings growth,” stated the 2003 report of the Office of Federal Housing Enterprise Oversight. The report added, “Senior management and the board failed to establish and maintain adequate internal control systems.”

That report ended up forcing Freddie to restate $5 billion in earnings and pay a $125 million fine.

But Freddie’s failings were small compared to those at Fannie.

In 2006, government investigators declared they had uncovered “extensive financial fraud” at Fannie and forced the company to restate billions of dollars of earnings and pay $400 million in fines.

Despite these scandals, despite holding more than $5.6 trillion of mortgage liabilities, despite owning or backing more than half of all mortgages in the United States, these organizations continue to operate much as they did before their corruption and incompetence were exposed.

Powerful members of the House and Senate, notably Sen. Chris Dodd (D-CT) and Rep. Barney Frank (D-MA), have spent much of their careers protecting Fannie and Freddie from scrutiny. Perhaps this is the reason the financial regulatory overhaul bill, informally known as the Dodd-Frank bill, says nothing about Fannie and Freddie: Dodd and Frank care more about Fannie and Freddie continuing to shovel money into the mortgage market than they do about their responsibility to taxpayers.

Fannie and Freddie have other powerful protectors, too, including Rahm Emanuel, a former Democrat congressman from Chicago who now serves as White House chief of staff. Emanuel received $320,000 in pay and $380,000 in stock for a 14-month stint as a Freddie Mac board member that began in February 2000, when policies that led to the scandals were being formulated.

But Emanuel might not have had a hand in those policies. The company’s proxy statement notes Emanuel was assigned to none of the board’s committees, which means he may have done little or nothing for his $700,000.

Instead of propping up Fannie and Freddie and leaving them untouched by financial reform, we should be looking for ways to break up or abolish them.

Two options: Sell their assets to private mortgage companies and have them go out of business, or allow private companies to invest in them and take them private.

Either reform would go a long way toward reducing government manipulation of the housing market, and we’d get rid of two entities that have long benefited political insiders at the taxpayers’ expense.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute in Chicago.