Readers Write: Ignoring Fannie and Freddie Rewards Incompetence

Published August 7, 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.

Steve Stanek is a research fellow at The Heartland Institute in Chicago. He can be reached at [email protected].