EDITORIALS : Somebody noticed
Posted on Sunday, October 5, 2008
NOT EVERYBODY ignored the early warning signs about Fannie Mae and
Freddie Mac, those twin public-private corporations that got the Panic of ’ 08
started when their sub-prime loans proved a time bomb that would threaten the whole economy. For what seems like years, the Wall Street Journal has been editorializing about the dangerous deficits the two Fs have been piling up at the taxpayers’ risk. As early as 1999, a prescient story in the New York Times by Steven A. Holmes, now making the rounds on the internet, sounded the alarm—if anybody had been listening. Other observers have taken editorial note of Fannie Mae, too: “The other day, we saw a list with the name Franklin Raines on it. Ever hear of Franklin Raines ? Neither had we. It turns out he’s chairman and CEO of Fannie Mae. No doubt he’s a sharp fellow but he’s an almost total political unknown. Fannie Mae, however, is getting better known all the time for its lobbying and questions about its bookkeeping.” —Arkansas Democrat-Gazette, March 12, 2004. ) Somebody else smelled something funny about Fannie Mae and Freddie Mac. On May 25, 2006, a U. S. senator from Arizona named John McCain issued a statement demanding that the whole operation be investigated, reformed and really regulated under a bill he was co-sponsoring. Here are some of the things he said on that occasion, with our emphases added: Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $ 10. 6 billion accounting scandal. The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives.
In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $ 5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $ 3. 8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform. For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac—known as Government-sponsored entities or GSEs—and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay. I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 1 90, to underscore my support for quick passage of GSE regulatory reform legislation. 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.
SENATOR McCAIN issued this plea for reform in May of 2006. Naturally he was
ignored, congressional maverick that he is. Why pay any attention to a senator
who’s never been part of the establishment ? Fannie Mae and Freddie Mac, despite John McCain’s best efforts, were not reformed, much to the country’s later regret, and Franklin Raines would later pop up as one of Barack Obama’s advisers in this presidential campaign—until he became an embarrassment and had to be dropped. Tell us again, Joe Biden, how Barack Obama called the sub-prime mess right because he once wrote a letter about it. And how John McCain was dead wrong, always opposing tighter government regulation. Even if the record shows quite the opposite. Like so many other things Senator Biden said in Thursday night’s debate, that claim won’t hold up in the light of day.
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