The two entities at ground zero of the financial meltdown in 2008 - Fannie Mae and Freddie Mac - will not be part of the finance “reform” bill that comes up for a cloture vote in the Senate on Monday.
Senate Banking Committee Chairman Chris Dodd (D-Conn.) told CNBC that the two mortgage giants will not be included in this round of “reform” but will be handled at some later date - yet to be determined.
"Fannie and Freddie and the whole GSE system and it's a great question and a legitimate one in desperate need of reform," Dodd said on CNBC. "But candidly there's only so much I could only take on with this bill, and so that comes up. But not in this round. It's in the next wave here we have to deal with GSEs."
Promise and cross my heart.
The truth of the matter is Democrats lack the political will to reform Fannie and Freddie - a political minefield for Democrats with an eye on the November elections and the albatross of Obamacare hanging around their necks.
Rep. Jeb Hensarling (R-Texas), the top Republican on the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, sent a letter to his GOP Senate colleagues today asking them to vote against cloture on the Democrats’ finance bill warning that “… the most glaring shortcoming in this legislation is what is not included in S. 3217: fundamental reform of the two largest recipients of taxpayer bailouts, Fannie Mae and Freddie Mac. Together they represent the two largest, most influence-exerting, regulation-avoiding, bailed-out institutions in America.”
Hensarling served on the Congressional Oversight Panel (COP) for the Troubled Asset Relief Program (TARP) and introduced last month a bill to reform government-sponsored entities such as Fannie and Freddie.
(Note, the $50 billion permanent bailout fund is still in the Senate bill up for a cloture vote Monday and would have to be stripped by amendment.)
Text of the Hensarling letter sent to Senate Republicans (in full):
April 23, 2010
Dear Senate Republicans,
On April 26, you will be called upon to cast one of the most consequential votes of the 111th Congress. I respectfully request that you oppose voting to proceed on S. 3217 in its current form, which is largely similar to the Wall Street bailout bill, H.R. 4173, which House Republicans unanimously opposed last December.
There are many reasons to oppose this legislation’s consideration in the Senate without significant changes to protect taxpayers. As many Republicans have noted, the bill institutionalizes too big to fail and contains a $50 billion fund that will enshrine us as a bailout nation. It also would create a new agency that will increase the cost of credit by empowering a single presidential appointee to make subjective decisions about credit products while supplanting safety and soundness concerns.
Notwithstanding those concerns, perhaps the most glaring shortcoming in this legislation is what is not included in S. 3217: fundamental reform of the two largest recipients of taxpayer bailouts, Fannie Mae and Freddie Mac. Together they represent the two largest, most influence-exerting, regulation-avoiding, bailed-out institutions in America. They weren’t located on Wall Street, but in Washington, DC, just miles from the government lab in which they were created. To date, their failures have directly cost taxpayers over $125 billion, with the potential to cost hundreds of billions more.Instead of developing a true plan to reform Fannie and Freddie, the House-passed bill specifically exempts them from the very regime it claims will end too big to fail, and the White House has labeled calls to include Fannie and Freddie reform in the Senate bill a “campaign of distraction.” Nothing could be further from the truth. The American people are tired of paying for the failures of others, and real regulatory reform means that there should no more government get out of jail free cards for bad corporate financial bets.
That’s why I have introduced legislation to reform Fannie and Freddie, the GSE Bailout Elimination and Taxpayer Protection Act, a version of which was included in the regulatory reform alternative bill offered last year by House Republicans. My bill would end the conservatorship for both GSEs within two years and, if they are financially viable, allow them to resume operations for a transition period of three years where they would be subject to phased-in new limitations, including smaller portfolio holdings, increased minimum capital requirements, minimum loan down payment requirements, and tighter limits on the size of mortgages that can be securitized. It would also permanently repeal the GSEs’ misguided affordable housing goals mandate, which pushed the GSEs to purchase poorly underwritten loans for which taxpayers are now footing the bill. At the end of the transition, the GSEs’ government-granted charters would expire, and they would be required to operate on a level playing field with their private sector competitors without government subsidies.
Ending the taxpayer subsidies may not be the only way to reform the GSEs, but, given the current options, it is clearly the best way. Other options like nationalizing them or concocting a public utility model simply do not solve the anti-competitive market distortions the GSEs have caused, nor do they protect taxpayers from the hundreds of billions of dollars in possible bailout costs they now face.
Protecting taxpayers is not a distraction; it is a paramount goal of any true regulatory reform effort. Unfortunately S. 3217, like the House bill before it, ignores the inherent and continuing dangers posed by these financial Frankensteins. I urge you to reject the flawed Senate bill and oppose the motion to proceed on S. 3217.
Yours respectfully,
Jeb Hensarling
Member of Congress
