When it comes to a Senate bill that showers massive regulations and taxes on a variety of U.S. businesses and is justified as preventing the next crisis, Republicans—particularly in the Senate—are not pushing hard enough to fix the liberal policies that were some of the main causes of the last crisis.
Amazingly, Democratic Connecticut Sen. Chris Dodd’s "Restoring American Financial Stability Act" doesn’t contain anything to rein in the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
And the Obama Administration’s "Christmas bailout" of the GSE’s—the December 24 order removing the caps of $400 billion that the Treasury was authorized to spend on the two mortgage underwriters—exposes the American taxpayer to unlimited liability for the entities and their potential new missteps.
One of the most important moments in investigating the financial crisis came in a little-noticed exchange in April of the Financial Crisis Inquiry Commission, created by Congress to probe the causes of the meltdown. This was when Commissioner Peter Wallison—one of the Republican-appointed members who is also a scholar at the American Enterprise Institute—asked Patricia Lindsay, former vice president of corporate risk for now-bankrupt subprime mortgage originator New Century Financial Corp., about her firm’s dealing with Fannie.
Lindsay confirmed that Fannie directly bought many of New Century’s bad mortgages all through the last decade. This is one more piece of evidence that directly refutes the notion of the left that Fannie and Freddie were late to the subprime party, and pushed there by a private sector competitor.
On the contrary, it shows that the GSEs were important drivers of the subprime party. (This part of the hearing can be viewed here and occurs at about the 50-minute mark.)
The actual enormity holdings of subprime mortgages by GSEs during this time was not revealed until Fannie reclassified in September 2009 a large part of its prime mortgage portfolio as subprime.
Indeed, according to housing expert Edward Pinto, Fannie’s former chief credit officer who has presented his findings before Congress and should himself be asked to testify before the commission, millions of mortgages to borrowers with credit scores of less than 660, considered by prominent researchers to be the dividing line for subprime loans, had been labeled by Fannie and Freddie as prime going back as early as 1993.
In his writings for the American Enterprise Institute, Wallison noted that this misrepresentation by the government-backed mortgage giants could have itself been a major factor in inflating the housing bubble. "Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007," he wrote.
My boss, Competitive Enterprise Institute President Fred Smith, had long warned about the systemic risk Fannie and Freddie posed to the financial system, testifying to Congress in 2000 that their implosion could cause a taxpayer bailout of as much as $200 billion.
That turned out to have greatly underestimated the $400 billion the bailout has already cost taxpayers and the possibly hundreds of billions more it will cost them, since the Obama Administration removed the cap on Treasury Department assistance.
But at the time, Smith’s was a voice in the wilderness as members of Congress pooh-poohed the notion of Fannie and Freddie ever slipping up. In 2003, Rep. Barney Frank (D.-Mass.), now chairman of the House Financial Services Committee, publicly called for the mortgage entities to "roll the dice" on less credit-worthy borrowers. As for Dodd, according to the new book The End of Wall Street by liberal journalist Roger Lowenstein, Dodd’s staffers would not even meet with Bush Administration Treasury officials when they wanted to discuss reining in Fannie and Freddie.
Before they were taken into conservatorship by the Treasury Department in late 2008 due to their losses, both Fannie and Freddie showered generous political contributions on Dodd, Frank, and a new member of the Senate named Barack Obama.
Unfortunately, it looks as though politicians are still giving a pass to the fat cats from Washington. But hopefully the rallying cry after these hearings will be "Fix Fannie and Freddie First."
As early as this week, a cloture motion to end debate on Dodd’s bill may be taken and require 60 votes. There are many bad things in this bill, including a massive new consumer agency with the power to track virtually every financial transaction to share with other big agencies like the IRS, onerous new restrictions on angel investors and venture capital that greatly delay funding promising startup firms, proxy access provisions that would federalize state incorporation laws and empower unions and progressive shareholders to wage director campaigns at the company and other shareholders’ expense.
But if Republicans had no other reason to stand together and block it, the lack of even attempting reform of Fannie and Freddie should be reason enough. As conservative Democratic strategist Pat Caddell said Tuesday on Fox News, Republicans should say, "No Fannie, No Freddie, No Bill."
The good news is that Senate GOPers have been unanimous on unsuccessful amendments to Dodd’s bill to rein in Fannie and Freddie, and even some Democrats—such as Evan Bayh (Ind.)and Russ Feingold (Wis.)—have joined with them. But if the GOP can’t hold its 41 in the Senate, the House GOP should still fight for Fannie reform relentlessly when the revised bill comes back to that chamber and try to pull some "Blue Dog" Democrats with them.
By not pushing hard enough to change the Dodd bill, Republicans run a risk similar to what the Conservative Party of Great Britain recently encountered.
A few months back, it looked like the Conservative Party of Great Britain had a lock on winning back Parliament. British citizens rightly blamed Prime Minister Gordon Brown and the Labor Party for mismanagement of the economy that led to a fiscal crisis and lethargic job growth. Yet when the election was held two weeks ago, the Tories won but fell far short of a majority. Conservative leader David Cameron became the first British Prime Minister in more than 70 years who will have to share power with the opposition party.
What happened? A big part of it was that Cameron both failed to pin the blame for the crisis on Brown’s bad policies. He also adopted a me-too approach on Labor’s proposed taxes and regulation to "correct" the crisis. He supported, for instance, the 50% bank bonus tax that commentators say will be devastating for the British economy.
If blame for the crisis and the solutions aren’t put where they properly belong, David Cameron’s fate could be that of the GOP.