Democratic Coverup for Fannie and Freddie Led to 2008 Meltdown
If anyone wants to find the people responsible for the current financial meltdown, they need to look no farther than the Democrats — Maxine Waters, Barney Frank and their Fannie Mae pal Franklin Raines — to indentify the culprits.
Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. What we need to do today is to focus on the regulator, and this must be done in a manner so as not to impede their affordable housing mission, a mission that has seen innovation flourish from desktop underwriting to 100 percent loans. — Congresswoman Maxine Waters (D-CA) in a September, 2003, hearing of the House Committee on Financial Services.
The above quote from Waters was in a hearing convened by then-committee Chairman Michael Oxley (R-OH) to discuss “the oversight of the housing government-sponsored enterprises.”
The hearing came about because two Bush Administration cabinet secretaries had presented the committee with a “proposal to improve regulatory oversight for the GSEs” with an opening statement, including: “There is a broad agreement that the current regulatory structure for the GSEs is not operating as effectively as it should. The Office of Federal Housing Enterprise Oversight is underfunded, understaffed and unable to fully oversee the operations of these sophisticated enterprises.
“This was reflected in the surprise management reorganization by Freddie Mac and by Wall Street reports stating that GSE oversight is viewed with skepticism because OFHEO is largely seen as a weak regulator. A strengthened regulator will send a signal to the markets that these entities have solid management and are engaging in safe and sound activities.”
Yet the response by the Democrats on the committee, who had turned what should have been an issue of protecting public trust and money into a partisan divide so that they could buy votes with their “affordable housing” social engineering scheme, was uniformly against improving oversight of GSEs.
Democrat Barney Frank (D-MA), who was the ranking Democratic committee member at the time (and is its chairman today), said, “I think it is clear that Fannie Mae and Freddie Mac are sufficiently secure so they are in no great danger… Fannie Mae and Freddie Mac do very good work, and they are not endangering the fiscal health of this country.”
Representative Waters continued her contribution to the discussion by making clear the Democrats’ true mission for Fannie and Freddie, namely to find a way to get minorities into houses even if they would not meet the qualifications for standard loans, such as in having the ability to bring a down payment to the transaction.
Waters seemed particularly proud to say “since the inception of goals from 1993 to 2002, loans to African-Americans increased 219 percent and loans to Hispanics increased 244 percent, while loans to non-minorities increased 62 percent. Additionally, in 2001, 43.1 percent of Fannie Mae’s single-family business served low-and moderate-income borrowers…” She then said “the GSEs are working” and reiterated her opposition to more oversight.
The next panel at that hearing included George Gould, a long-time Freddie Mac board member and former Under Secretary for Finance at the Department of the Treasury, who discussed Freddie’s view of the situation. He testified that:
• “Freddie Mac’s franchise is rock solid. Our exposure to both credit risk and interest rate risk remains extremely low.”
• “These are strong incentives for the GSEs to meet the goals year after year, to say nothing of the reputational penalties of failing to meet a goal.” (This is important when we turn to Franklin Raines in a moment.)
• “Considering that we have consistently met the permanent affordable housing goals, additional enforcement authority seems unnecessary. Therefore, we would respectfully suggest that no additional authority is needed.”
This last statement reinforces the position taken by Maxine Waters that the mission of the GSEs is primarily to increase “affordable housing” regardless of how that gets done.
Next up was Franklin Raines, CEO of Fannie Mae. Raines made millions in bonuses when Fannie Mae manipulated earnings to meet the highest profit and “affordable housing” targets. He settled with the SEC in a sweetheart deal that cost him little or nothing out of his own pocket, even though Fannie Mae was slapped with the biggest fine in SEC history for overstating Fannie Mae’s profits by $6.3 billion over several years.
Raines went through the standard litany such as “provid(ing) $2 trillion for 18 million underserved families” but did not oppose modernizing GSE oversight. Indeed, Raines admitted that “you can imagine our trying to get into some area that could cause a safety and soundness issue.”
During the hearing Rep. Gregory Meeks (D-NY) said “I am just pissed off at OFHEO because if it wasn’t for you I don’t think we’d have to be here in the first place.”
The head of OFHEO, the under-funded regulator of Fannie and Freddie, did not take that lying down: “Congressman, OFHEO did not improperly apply accounting rules; Freddie Mac did. OFHEO did not try to manage earnings improperly; Freddie Mac did. So this isn’t about the agency’s engagement in improper conduct, it is about Freddie Mac.”
Though this 2003 hearing (which is widely being reported on the Internet has having happened in 2004, in part because of this otherwise-excellent video showing some of the highlights), it is only a small part of the consistent support of Fannie Mae and Freddie Mac by Democrats regardless of the risk caused by or fraud perpetrated by those organizations.
Senator Christopher Dodd (D-CT), the largest recipient of campaign contributions from Fannie and Freddie in the past decade, also turned a blind eye to the risks posed by the GSE’s.
In an article earlier this month, the Washington Post (no friend to the Bush administration), offered this: “Sen. Christopher Dodd, the Democratic chairman of the Senate Banking Committee, has the gall to ask in a Bloomberg Television interview: I have a lot of questions about where was the administration over the last eight years’” before explaining that “Dodd — who along with Democratic Sens. John Kerry, Barack Obama and Hillary Clinton were the top four recipients of Fannie and Freddie campaign contributions from 1988 to 2008 — actively opposed such measures and further weakened existing regulation.”
The corruption of Fannie Mae was not simply partisan, but it was also racist in its own way. Just as Fannie and Freddie threatened to harm “racist” banks which didn’t loan money to (unqualified) minorities, the leadership of the GSEs was clearly just as afraid of being called racist by minority (by race, not political party) members of Congress. In this remarkable 2005 video of the swearing-in ceremony of the Congressional Black Caucus (with an applauding Michelle Obama prominently featured), Fannie Mae interim CEO Daniel Mudd, cozies up to the CBC: “I humbly ask you to help us and help me… If there areas where we could do better, we’d like to hear it from our friends, and I’d be so bold as to say our family, first.” Mudd was afraid of the CBC. And who wouldn’t be, in a society where an unfounded charge of racism can destroy fortunes and careers?
What lessons can we learn about confusing social programs with the proper functions of government, about the inherent conflict between believing that a cause is worth any price and protecting citizens’ money from waste and corruption? (Indeed can we not ask the same question about the conflict inherent in Paulson’s bailout proposal?)
Democrats have taken the wrong side in this conflict for years, right up until the bitter and expensive end of Fannie and Freddie as independent institutions, including their multi-billion dollar tax-payer bailout .
In fact, over the years, their actions to protect Fannie and Freddie from Congressional prying are nothing short of a coverup.
Sens. Dodd and Chuck Schumer (D-NY) wanted to expand Fannie and Freddie as recently as a year ago, while John McCain was one of just 4 sponsors of a 2005 measure to rein in these financial Frankensteins. McCain offered support of the bill with this statement: “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.”
But when even Bill Clinton has to admit the truth, you know it’s not just a matter of parsing words: “The responsibility that the Democrats have may rest more with resisting any efforts by Republicans in the Congress or by me when I was president to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”
Part of the reason the Democrats are so angry about the Paulson bailout proposal failing is that it allows the public that much longer to figure out who is primarily responsible for the current debt market turmoil.
The villains in this story are primarily Barney Frank and Christopher Dodd, with conspirators throughout the Democratic Party, the Congressional Black Caucus, and corrupt leftist organizations like ACORN, which not only received Fannie Mae money despite repeated convictions for voter fraud, but which was slated by the Democrats to share in any future potential profits from the bailout.
To use the words of House Republican Leader John Boehner, the bailout bill was a “crap sandwich”. But what beside such a meal should we have expected given the disgusting history of fraud by GSEs and neglect and stonewalling by their Democratic defenders in Congress?