Foxes Guarding the HenHouse? The Actions of Barney Frank, Charles Schummer, and Chris Dodd

I am sitting in Europe watching Barney Frank, Charles Schummer, and Chris Dodd, among others, parade across the screen offering to lead the charge to solve the Wall Street mess. With the effort to assign blame for the meltdown in the mortgage market led by the collapse of Freddie Mac and Fannie Mae well underway I wondered, what did they do to try to fix this looming problem. So let’s look at who did what over the last two years. The Democrats were in charge of the Congress. Did they try to avert the problem? Did they warn? Did they reign in the abuse? Here are the facts for 2007, you tell me:

January 1, 2007 The International Economy

Fannie and Freddie post-election: the significance of the Democratic victories.

BYLINE: Owen Ullman

A decade ago, Fannie Mae and Freddie Mac, the United States’ two mortgage financing behemoths, were flying high. They were among the most profitable companies in the world, had political connections to the White House and Congress, earned enormous bonuses for their corporate chieftains, and did not have to play by the same rules as other corporations. For all that, they could thank their congressional charters, which established them as Government Sponsored Enterprises (GSEs).

Those charters, which remain in place, grant them lines of credit from the Treasury, exempt them from local taxes, allow lower capital requirements than banks must meet, and spare them the mandatory disclosure requirements imposed on other public corporations. Most importantly, the implicit guarantee that Uncle Sam would bail them out in a crisis means a lower risk premium of roughly twenty-five basis pointswhen they borrow money. That quarter-point advantage is the basis oftheir lucrative business of buying and securitizing mortgages in thesecondary market.

As they grew larger and richer, critics warned that their lack of transparency and weak federal oversight would get them in deep trouble. Not a chance, they countered arrogantly. Well guess what? Like Icarus flying to close to the sun, the two companies have fallen far andfast onto their–dare we say–fannies.
It turns out the critics were right on the mark about the abuses that could result from lax accountability. Freddie paid a fine in 2003to settle charges that it misstated prior earnings by nearly $5 billion. Last December, Fannie reported that it overstated past profits by $6.3 billion. Meanwhile, federal regulators are trying to recover bonuses the top executives of each company received during the time earnings were misstated. In a suit filed against Fannie on December 18 to recover $115 million in compensation, the Office of Federal Housing Enterprise Oversight (OFHEO) said former Fannie Mae CEO Franklin D.Raines and other executives used numerous ruses to boost the company’s bottom line, and thus their bonuses.

Yet amid all the turmoil, lawsuits, and financial uncertainty befalling the companies, the current management teams at Fannie and Freddie have something to be thankful for in 2007: Democratic control of Congress.

The Democrats are less likely than Republicans to rein in the two companies’ financial practices. For the most part, Democrats like having leverage over the two GSEs so they can prod them to establish larger funds to make housing more affordable to low-income families. It is one of the top goals that the new House Financial Services Committee Chairman Barney Frank (D-MA) has promised to pursue.
Frank, who has one of the sharpest minds in Congress, also has predicted that Congress will pass a bill in 2007 to tighten regulation of Fannie Mae and Freddie Mac. That may be his intention, but the political reality is that the Democratic Party has many higher prioritiesto pursue after twelve years out of power. Frank’s counterpart in the Senate, Chris Dodd (D-CT) has not expressed any interest in going after the GSEs. So it is likely that any legislation will remain on the backburner.

18 August 2007 The Washington Post

Higher Caps Urged For Fannie, Freddie; Democrats Seek Bigger Role for Firms

BYLINE: David S. Hilzenrath; Washington Post Staff Writer

Leading Democrats pressed their case yesterday to give Fannie Mae and Freddie Mac a larger role in the troubled mortgage markets, arguing that the two companies should be allowed to buy bigger mortgages and more of them.

The market upheaval has shifted a long-running discussion of the government-sponsored finance companies from the esoteric edges of inside-the-Beltway policy arguments to the forefront of the debate over how Washington should respond to a credit crunch. It has given supporters of Fannie Mae and Freddie Mac fresh ammunition to challenge those who think the companies should be kept on a tighter leash.

Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee and a candidate for president, told reporters that regulators should raise limits on the companies’ mortgage investments by 5 percent so they can pump more money into the housing finance system. Together, Fannie Mae and Freddie Mac hold about $1.4 trillion of mortgages and securities backed by mortgages.

Dodd was elaborating on a position he staked out days earlier and was firing back at President Bush, who last week said Fannie Mae and Freddie Mac should be reformed before the government considers loosening their restraints.

Dodd said Congress can’t pass a reform bill fast enough to deal with the crisis at hand.

20 September 2007 The New York Times

Fannie Mae to Be Allowed to Expand Its Portfolio

BYLINE: By ERIC DASH

A government regulator gave Fannie Mae permission yesterday to slightly increase the amount of mortgages it can buy for its investment portfolio, a move that analysts say will do little to ease the strain on the housing market.

The moves, along with similar ones for Freddie Mac, should give the nation’s two biggest mortgage buyers a bit more flexibility in managing their portfolios. The changes are also intended to encourage the companies to purchase as much as $20 billion each in subprime loans.

But just two days ago, Ben S. Bernanke, the Federal Reserve chairman, in a letter to Representative Barney Frank of Massachusetts said relaxing the portfolio restrictions on Fannie Mae and Freddie Mac could prove ”ill advised.”

Wall Street analysts said that Ofheo’s changes would do little to ease the pressures on the housing market. And Fannie Mae, which has lobbied to raise the portfolio limit by 10 percent, and several Democratic lawmakers said yesterday that the moves did not go far enough.

In a statement, Senator Christopher J. Dodd of Connecticut, the chairman of the Banking Committee and a Democratic candidate for president, called Ofheo’s decision ”timid and inadequate.” He said the administration was ignoring the severity of the subprime mortgage crisis.

Others, however, suggested it could be a way for Fannie Mae and Freddie Mac to start regaining Ofheo’s trust.

”I actually think this was a smart way of giving the enterprises an opportunity to prove themselves,” said Josh Rosner, a managing director at Graham Fisher & Company who has been critical of Fannie Mae. Under the requirements, Fannie Mae and Freddie Mac must provide more frequent and detailed financial disclosures, including a monthly report that should more clearly parse out their purchases of subprime loans. . . .

It also came just two days after Mr. Bernanke sent a letter to Mr. Frank, the chairman of the House Financial Services Committee, that defended the current portfolio limits and urged Congress to move cautiously if it considers letting Fannie Mae and Freddie Mac buy mortgages over the current $417,000 limit.

16 November 2007 The Investor’s Business Daily

Freddie Mac’s Woes Come As Dems Try To Expand Lender; Sen. Schumer Not Giving Up; $2 bil loss, weak capital makes it harder to argue for larger Freddie, Fannie

BYLINE: SEAN HIGGINS

SECTION: FRONT PAGE NEWS; Pg. A01

LENGTH: 652 words

Freddie Mac on Tuesday declared a $2 billion third-quarter loss and warned it may have to slash its dividend and curb its mortgage buying to meet capital requirements.

A top Senate Democrat stuck to his solution: Let Freddie and Fannie get bigger. But it may be a harder case to make now. . . .

Big Problem, Bigger Solution?

Sen. Chuck Schumer, D-N.Y., said in a statement Tuesday that it should surprise no one that the government-sponsored enterprises have been “negatively impacted” by the credit crunch.

“Today’s news does nothing to lessen the critical role that the GSEs must play in providing much-needed liquidity to a struggling market,” Schumer said.

A spokesman for Schumer confirmed he was referring to his own plan to lift the GSEs’ portfolio caps by 10%, at least temporarily.

Leading Democrats had proposed lifting the GSE caps to alleviate the broader housing crunch.

But that was before GSEs looked like part of the problem, reporting huge third-quarter losses.

To reach its mandated level of capital, Freddie Mac has signaled it may voluntarily limit its growth.

That comes as Democrats were gearing up to push the opposite direction. Schumer, and Rep. Barney Frank, D-Mass., have both introduced bills that would lift the caps by 10%.

Their legislation would take 85% of that increase and use it to help refinance subprime mortgages at risk of foreclosure.

Frank is chairman of the House Financial Services Committee, which has authority over GSEs. Schumer is on the Senate Banking Committee. . . .

Republicans Favor Tight Curbs

Privately, a Senate Democratic aide conceded that enlarging GSEs now will be a “tough row to hoe.”
Senate Banking Chairman Christopher Dodd, D-Conn., didn’t mention expanding GSEs in a statement on Freddie’s losses.

Republicans have long opposed expanding the GSEs, arguing the risk of a financial crisis is too high.
“Because the GSEs are already large enough to pose a risk to the entire housing finance system, we must focus our efforts on making sure they are well-capitalized and well-regulated, rather than discussing ways to expand them,” Sen. Richard Shelby, R-Ala., the ranking Republican on the Senate banking panel, said in a release.

Freddie and Fannie can borrow at lower rates because Wall Street assumes the federal government would bail out them out in a crisis.

Robert Steel, a top adviser to Treasury Secretary Henry Paulson, told the Hill newspaper that Congress should focus on comprehensive GSE reform rather than raising the portfolio caps.

Those fears gained greater currency in 2004 when the GSEs were forced to restate past earnings lower. The scandal resulted in the forced departure of then-Fannie Mae Chairman Franklin Raines.
Congress later passed legislation giving the Office of Federal Housing Enterprise Oversight more authority over the GSEs.

Bottomline–Frank, Schummer, and Dodd, apart from being some of the top recipients of Fannie Mae and Freddie Mac largesse, did little to avert this crisis and in fact appear to have exacerbated it. So count me a sceptic when it comes to trusting these clowns to put together a bailout program. They ignored clear warnings. It is not a matter of opinion, it is a fact of history.